Planning for your financial future? Give your plans a boost with information tailored for you
Start Choosing Here »
By Lucia Mutikani

WASHINGTON -- A growing number of Americans quitting the labor force are likely gone for good, offering a cautionary note to the Federal Reserve as it tries to gauge how tight the job market is and how quickly to raise interest rates.

For a long time, data suggested a significant portion of the decrease in labor force participation was because many job seekers had grown frustrated with their search and had given up looking. If the job market tightened enough, the thinking went, these Americans would be lured back to hunt for work again.

But a different picture is now emerging. Data shows participation in the past few years has fallen mainly because Americans have retired or signed up for disability benefits.

"The data suggest that the recent exits from the labor force have been more voluntary in nature than was the case in 2009,
when the economy was weak and job prospects were dire," said Omair Sharif, senior economist at RBS in Stamford, Conn.

According to economists who have analyzed Labor Department data, 6.6 million people exited the workforce from 2010 and 2013. About 61 percent of these dropouts were retirees, more than double the previous three years' share.

People dropping out because of disability accounted for 28 percent, also up significantly from 2007-2010. Of those remaining, 7 percent were heading to school, while the other 4 percent left for other reasons.

In contrast, between 2007 and 2010, retirees made up a quarter of the six million people who left the labor force, while 18 percent were classified as disabled. About 57 percent were either in school or otherwise on the sidelines.

"This suggests the current drop in the labor force is more structural in nature," said Sharif.

If so, there is less hope of luring people back to hunt for work as the job market tightens, as many Fed officials believed would be the case. And the U.S. central bank, which has held benchmark rates near zero since December 2008, will likely need to push them up sooner than they would have otherwise.

"It is not clear whether the overall participation rate will increase anytime soon, given that the underlying downward trend due to retirements is likely to continue," said Shigeru Fujita, an economist at the Federal Reserve Bank of Philadelphia.

Less Labor Market Slack

Some Fed policymakers, such as San Francisco Fed President John Williams, are starting to acknowledge that structural factors are playing a big role in the labor force's decline.

In a speech last month, Williams said the slack in the labor market could be "much less than assumed," cautioning that inflation could rise more quickly than currently anticipated.

There are people who aren't in the labor force who say they want a job and who could potentially be drawn back in.

Last year that figure stood about 700,000 higher than it would in a normal market, according to the Labor Department's survey of households. But if employment increased by about 115,000 jobs a month, as the survey found it did last year, they could easily be absorbed in about six months.

The disappearing slack is underscored by a sharp decline in the ranks of the short-term unemployed.

These workers, whose skills are still sharp, are viewed as the most desirable by employers, economists say. Further, they appear to hunt for work more aggressively, according to a study released last week by former White House economist Alan Krueger.

In contrast, long-term unemployed can see their skills erode

and lose contact with people who could help them find a job. Because employers find them less desirable, their presence in the labor market may not do much to keep wages down.

The unemployment rate for people out of work for six months or less was at 4.2 percent in February, well below its 5.2 percent post-recession average. The number of short-term unemployed workers is now at about the same level as in 2004.

As for the long-term jobless, their ranks are still more than double their 2004 level.

Some economists say the dwindling pool of attractive workers may already be leading employers to bid wages up. Average hourly earnings for production and nonsupervisory workers notched their biggest gain in four years in February, even as some broader measures showed little acceleration.

"With the short-term unemployment rate already back to its pre-crisis level, any further declines will put upward pressure on wages and ultimately inflation," said Torsten Slok, chief international economist at Deutsche Bank Securities in New York.

"For the Fed, the problem is we are still having a fed funds rate which is zero. I think the Fed will start to change its tone, most likely in the second half of this year."

Increase your money and finance knowledge from home

Introduction to Preferred Shares

Learn the difference between preferred and common shares.

View Course »

Advice for Recent College Grads

Prepare yourself for the "real world".

View Course »

Add a Comment

*0 / 3000 Character Maximum


Filter by:

Many of the jobless are dropping off the rolls because they are are victims of age discrimination, they have reached 62 or 65, and are opting to start collecting their SS benefits, they have been unemployed for longer than 6 months, and are often shunned by propective employers as if they were lepers, or thei they haven't got the educational foundation and/or the relevant job skills for the many jobs that ARE available.

March 27 2014 at 2:05 PM Report abuse +4 rate up rate down Reply

There is an excess of people that need a job thanks to the large underground undocumented population, expired visa holders and valid visa holders. The BLS disclaimer on their employment reports about not asking legal status does a disservice to American citizens in need of employment. As long as there is an invisible labor force that only the employers can pick an choose from millions of US citizens will remain unemployed or listed as not in the labor force.

March 27 2014 at 10:51 AM Report abuse -3 rate up rate down Reply

Instead of having people on the phone making random calls, how about sending youir people out, pounding the pavement, get down to where we are and ask us to our face about the job market?! You might get a different picture.

March 27 2014 at 10:34 AM Report abuse +2 rate up rate down Reply

I know the theory that most workers dropped out of the labor market due to retirement is false. In my state Age discrimination is alive and well. Dishonest employers take advantage of the State's LWD web site. Some employers will call you at home to find out your age. The fact that your in the State's unemployment/ labor computer system is proof your of legal age to work but those employers looking to abuse the system by discriminating against older people will still do so.

March 27 2014 at 10:34 AM Report abuse rate up rate down Reply

I get real tired of you republicans saying this administration is passing out benefits for the non working Americans. This administration has nothing to do with such junk remarks. The republicans control the house and they have to pass legislation before the president can sign it into law. Not to forget the red states are cutting back all kinds of benefits for the working class

March 27 2014 at 9:54 AM Report abuse +4 rate up rate down Reply

I.m of hearing this nor do I believe it. We are Americans not the Greeks, the French or the Italians, we don't quit or give up we owe more than that to both the generations that came before us and those that follow us, it seems I have more respect for the men of this country than 90% of the clowns sitting in Washington.
So everyone knows I am 68 years old have been unemployed since May of 2012, I search every day, work at what is available and will continue to do so until I no longer can not because I don't want to but for what ever reason I am unable.
For those who want to wallow in self pity or quit try a little intospection and study a little of what prior generations went through before whinning about your difficulties.
For me though there is no surrender to become a ward of the state.

March 27 2014 at 9:44 AM Report abuse +2 rate up rate down Reply

Well this Administration has been right free with handing out benifits, and encouraging people to not work, as it is hard for these academia types to work with the real world, and so instead of trying to enable people to work they instead enslave them with handouts, Unemployment of 99 weeks, disability, and dropping the work for welfare requirements. And those who want to work are usually crowded out by younger cheaper employees. Experience does not matter anymore, a colleg degree is all it takes, have seen fine engineers and crafts people pushed out in favor of book learned youngsters who have no idea what is needed to excell in real world.
First off get government out of the way, and let business grow, instead of back dorring more and more regulations that stifle business.
Stop the food stamp and welfare push, and the free cell phone programs that this Administration has made great strides in increasing, while spending our hard earned money.

March 27 2014 at 9:41 AM Report abuse -5 rate up rate down Reply

Book Cooking is alive and well

March 27 2014 at 9:40 AM Report abuse rate up rate down Reply

Along with you phony jobs numbers the lying ass govt

March 27 2014 at 9:38 AM Report abuse -1 rate up rate down Reply

Most are like me, laid off in 2008 at age 58 and could not find another job. Did home repairs until people stopped spending in 2010 then started drawing from personal accounts until I was 62 and retired early.

March 27 2014 at 9:16 AM Report abuse +4 rate up rate down Reply