Under Pressure
Pressure pressing down on me...Splits a family in two, puts people on streets..."
As the recession eases across that United States and the Swine Flu fizzles out, the pundits and press have pushed their next big scare story – the growing army of long-term unemployed.
The media call these people unemployed and underemployed workers, a term which basically includes those who are working, but whose skill levels are higher than those demanded by their jobs, and those working in part-time jobs who might prefer full time employment.
The real issue is not one of how many people consider themselves to be underemployed, nor is it how long it takes people to find jobs, but rather why does the labor market take so long to clear after a bout of recession. In other words, what keeps people from getting jobs, or moving up to better ones? Really, it is a question of basic economics.
Like any market, the market for labor is subject to the laws of supply and demand. Companies, governments, entrepreneurs – employers in general – purchase workers from the labor market, and individuals decide whether or not to participate. Unlike in command economies like North Korea, where government fiat dictates who will work where and for how much, in our economy, individual employers and workers decide whether to work together and for what price. Recessions disrupt the labor market by initially squeezing out demand for workers at the current market price (or wage rate). This leads to layoffs and wage cuts.
In order to lessen the impact of a recession, government provides a “safety-net” consisting of things like unemployment insurance, health insurance subsidies, even supplemental income. These benefits push up the “cost” of working, especially for more marginal members of the labor force, and can lead to a reduction in the supply of labor, and in many cases long-term unemployment or underemployment, as workers find it more lucrative to receive government benefits than to enter the labor force at the current market wage rate. Other forces may keep even less marginal workers out of the labor force during recessionary times. Since jobs are more difficult to find, some potential workers may decide to go back to school to learn new skills, others may decide to stay home with their children rather than pay for child care, still others may decide that this is a great time to retire, or to take that Winnebago trip across the country that they had always dreamed about. In the current recession, it is also very likely that falling home prices have trapped many people in geographic areas with shrinking economies (like Michigan and upstate New York), even though there is demand for their skills in the mountain states and south.
All of these factors tend to reduce the supply of labor. As the chart below shows, workforce participation rates in the United States have fallen since peaking in 1999 – during the height of the dot-com boom. In fact, the percentage of working age males who actually enter the labor force has been falling steadily for the past 30 years. It was through massive growth in female workers in the 1980s and 1990s that the labor force participation rate stayed stable at between 65 and 68 percent of the working age population.
There was a significant downtick in labor force participation during the current recession. This was likely due to both difficulty in finding jobs (particularly in certain areas of the country), but also because of incentives to withdraw from the labor market until things stabilize and wages rise. As with any market, supply and demand will eventually tend toward an equilibrium state.