TREND WATCH: What’s Happening? As the Fed considers raising interest rates, one crucial unknown is whether labor force participation among prime-age men will continue to recover. New research suggests that it won’t: The vast majority of these nonworkers are disabled, “retired,” or otherwise report no interest in rejoining the labor force.
Our Take: If these men are indeed out of the job market for good, it means the economy is closer to full employment than most economists think. It also means the Fed may have to abandon its gradualism and speed up its interest-rate hikes in order to avoid inflation—a policy turn with possibly ominous consequences for markets and the economy.
All eyes are on Federal Reserve Chairwoman Janet Yellen after she suggested at the latest Group of 30 banking seminar that the central bank is on track to raise interest rates. In her speech, Yellen also noted concerns over persistently low inflation, which many on the Fed Board of Governors believe reflects an unexpectedly abundant supply of labor. Foremost on their mind—and Yellen’s in particular (she is a labor economist)—is what’s happening to prime-age male employment, which is now the main demographic lagging behind its pre-2008 propensity to work.
Some say economic growth will continue and inflation will stay low while more of these men return to employment. New research, however, suggests otherwise.
Let’s take a closer look.
CALLING ALL MALE WORKERS
The Fed is waiting anxiously to see whether men’s work rates pick up. Over the last several years, many workers deemed “inactive” during the Great Recession have indeed returned to the employment pool. But some are returning more than others: While the employment-to-population ratios for women and the 55+ are above or at least near their pre-recession levels, work rates among 16- to 54-year-old men (“prime-age workers” are defined as 25- to 54-year-olds) are lagging significantly behind.
The work rates for men and women of all ages also lag well below their pre-GFC levels. But most of this is a “composition effect”; it’s due to the rising population weights, as Boomers age, in the older 55+ brackets with lower rates.
Bottom line: Since we’ve come out of the Great Recession, there’s been a real divergence between employment growth (which, through starting to fade, is still well over 1.0%) and working-age population growth (which, with Boomers retiring, has been shrinking down to near absolute zero). Sooner or later, this gap must close. And once that happens, look out: Working-age population growth, expected to be just 0.1% in 2021, will be the only thing driving U.S. GDP growth except labor productivity—a frightening thought.
The only question is whether we’re talking sooner or later. Historically, the gap usually closes when the economy enters a recession and the employment growth line plunges deep into the red. But even if we manage to avoid a recession, the employment line can only stay above the population line if the employed share of the population keeps rising. It’s hard to see how that can happen in the coming months unless there are lots of prime-age men who still intend to go back to work.
A HISTORICAL PERSPECTIVE
Lagging prime-age male labor force participation since the Great Recession is in part the continuation of a longstanding secular trend. Over the past three generations, male LFP has steadily crept downward, in part thanks to structural changes in the economy, such as the decline of blue-collar industries, the rise of automation, and the shift toward female-dominated jobs. (See: “The Spread of the Pink-Collar Economy.”)
In the 1950s and early ‘60s, nearly all 25- to 54-year-old men were in the labor force—that is, either employed or looking for work. Only about 4 out of every 100 weren’t. Today, this figure has tripled to 12 out of every 100, or more than 7 million men. The share of women out of the labor force has been growing, too, but this development is much more recent and less severe.
ARE THESE MEN COMING BACK?
Some say that many of these male nonparticipants simply have yet to come back to the workforce. But a new study from the Mercatus Center at George Mason University suggests that a comeback is unlikely, because most of these men don’t want a job.
The majority of nonworking males—56%—say that they are disabled. About one-third are (early) retirees, homemakers, caregivers, or students. Only 2% to 3% are would-be workers who have given up job-hunting out of discouragement. And only about a quarter say they want a job under any circumstances. Men who don’t want a job accounted for two-thirds of the rise in labor force inactivity from 1969 to 2014. Since 1964, the number of jobless men not looking for work has outnumbered those looking every year except for 1982 and 1983.
By planning to gradually raise rates, Yellen and the Fed are assuming that there’s still slack to be drawn out of the labor market. But the Mercatus Center report raises an important question: What if there’s simply no slack left?
Turning to the demographic profile of these nonworkers, we see further evidence that many are out of the workforce for good. Prime-age nonworking men are much more likely to be high school dropouts, never married, or without children at home. Of the one quarter who have worked in the past twelve months, over half worked in a physical, blue-collar job. They’re concentrated in rural areas and in the Southeast—home to 33% of the inactive disabled and 29% of early retirees. What’s more, according to a 2014 New York Times survey, an estimated 34% of nonworking men have criminal records—often a barrier to work.
Regionally, in other words, nonwork is correlated with higher obesity rates (Southeast) and more generous state welfare benefits (Pacific and Mideast)—not so much, as some might suppose, in areas of manufacturing decline. “Obesity belt” beats “rust belt” in this case. Demographically, nonwork is correlated with lower earnings potential (less education) and weaker earnings incentives (fewer family responsibilities).
Many of these men are able to get by thanks to familial support and government assistance programs. The most common living arrangement for single, nonactive, nonretired men is cohabiting with a relative head of household. Three-quarters of inactive men live in a household that received some form of government assistance during the previous year. Three out of four disabled men receive disability benefits.
HOW ARE THESE MEN KEEPING BUSY?
Observers present conflicting portraits of how nonworking men fill their time. Some, like demographer Nicholas Eberstadt, argue that they’re mostly idle: After all, by some accounts, these men spend 5.5 hours a day watching TV and movies. Similarly, University of Chicago economist Erik Hurst reports that inactive “lower-skilled” men in their 20s (those with less than a bachelor’s degree) increased their leisure time by four hours a week between 2000 and 2015, with most of it being spent playing video games. Hurst even says that these men report being happier than they were in 2000.
American Time Use Survey data seem to corroborate these findings. More idle time is correlated with more time spent on leisure activities: Nonworking men spent 3.5 more hours daily performing leisure- and sports-related activities than their employed counterparts in 2016, by far the biggest difference of any category. By comparison, nonworking men spent just half an hour more time per day performing household activities than employed men, and less time taking care of others.
Less sanguine is Princeton economist Alan Krueger, whose research shows that prime-age labor force dropouts are in poorer health and report more emotional distress. Krueger reported in 2016 that 47% of these men take pain medication daily—more than double the rate of their employed counterparts. Of these, roughly two-thirds say they take prescription medication (mostly funded by government programs: Medicaid, Medicare, or VA), so we’re not just talking about aspirin here. Considering the enormous scope of America’s opioid epidemic (see: “A Nation Hooked”), the notion that a significant share of our prime-age nonwork problem is in fact an addiction problem cannot be discounted.
So what’s the true story? Depending on which economist you ask, nonparticipating prime-age men are either happy-go-lucky gamers or lost souls hooked on pills. But the reality is likely somewhere in between. In the Times survey, 43% of jobless men agreed that not working has hurt their mental health, while 25% said they’re “mostly happy” about not working. In other words: There’s some truth to both sides.
What these two groups do have in common is less social engagement generally: Not only are these nonparticipants not contributing to the economy through formal labor, but they are also less likely than the employed or unemployed to help out around the house or volunteer.
DRIVERS
What has prompted prime-age males to withdraw from the labor force? Structural changes in the economy are perhaps the most widely cited factor. And for good reason: The jobs that have grown the fastest over the past decade-plus are situated in so-called “pink-collar” fields such as educational services, health care, and hospitality. These are fields traditionally dominated by women. Male-dominated fields like manufacturing have actually eliminated jobs since 1990, leaving behind millions of men accustomed to well-paying blue-collar positions.
But there’s much more to the story. For many inactive men, the prospects of getting well-paying jobs have sunk at the same time that cultural, social, and policy changes have made it easier to live without working.
Fully 44% of the jobless men in the Times survey said that there were jobs in their area they thought they could get, but weren’t willing to take. The declining willingness of prime-age males to work, combined with the relatively larger number of individuals nearing retirement, helps explain why the number of working-age men receiving Social Security Disability Insurance (SSDI) has grown so rapidly. (See: “The Boom in Disability Benefits.”) In fact, according to the Times, health problems/disabilities are now the number one most cited reason for nonwork, with 48% of survey respondents citing poor health as a major factor.
The availability of disability benefits points to the rising economic incentives behind nonwork. The average person on SSDI earns about the same as a full-time minimum-wage worker after taxes (around $13,000 annually), receives free health care (Medicare) on top of that, and possibly (depending on the state) other benefits as well. In other words, disability can look more appealing than a low-wage job.
Not surprisingly, SSDI applications historically rise and fall with the business cycle—with more people applying when jobs get tougher to find. The application rate for new benefits reached its all-time high in 2010 and has since been slow to fall. Along the way, a large contingency-fee litigation industry has developed around the application process, which has steered SSDI applications toward claims that are hardest to prove or disprove with medical testing. In 1960, roughly 16% of all applications were based on musculoskeletal complaints (mainly joint and back pain) and emotional disorders. Today, 51% are. Unfortunately, SSDI status is very sticky: Very few SSDI beneficiaries ever return to work.
Meanwhile, men who don’t claim to be disabled feel less pressure to work. Fewer need to provide for a spouse or kids. The Internet has made unemployment far less isolating. And unlike older generations, Xers and Millennials don’t see formal employment as a central part of their identity. (See: “Why Americans Are Working Less.”) The idea of voluntarily not working or holding out for a better option is less stigmatized.
WHERE DO WE GO FROM HERE?
Optimists contend that the right mix of policies and incentives could help America’s nonworking men re-enter the labor force. Some blue-collar companies are attempting to tackle the problem head on by setting up apprenticeship programs, partnering with community colleges, and establishing pipelines that make it easier for prime-age males to find work. Proponents of this strategy argue that addressing the “skills mismatch” between blue-collar jobs and underqualified job-seekers could help bolster prime-age male LFP.
But for now, there is no magic button that policymakers can simply push to bolster prime-age male LFP. At best, it will be years before experts can agree upon a package that draws nonparticipating men out of the woodwork—a timeline that doesn’t mesh with Yellen’s interest-rate playbook. At worst, prime-age male LFP may never fully recover—which would mean a permanently smaller labor force and a smaller GDP for decades to come.
Another major issue for policymakers is the rise of the gig economy and its impact on the labor market. The line between being employed and being out of the workforce is getting blurrier over time as people on the margins of employment increasingly opt for informal, ad-hoc jobs. To many Xers and Millennials, the growth of the gig economy (including on sharing-app platforms like Uber) provides a way to earn money when and where they want, no strings attached. (See: “The Gig Economy is Alive and Growing.”)
The problem? This type of work, incorporating few economies of scale, is inherently low productivity. Thus, while more men finding work would solve the immediate problem of employment, it wouldn’t necessarily solve the longer-term problem of declining U.S. productivity growth. The Fed realizes that the rise of the gig economy constitutes a major paradigm shift within our economy: Last year, Fed Governor Lael Brainard acknowledged that the growth of the contingent workforce “affects the way we assess maximum employment and the way we interpret important labor market outcomes.”
The message: In order to stave off inflation, the Fed will likely be forced to shift its interest-rate strategy into a higher gear. And even then, longer-term headwinds like low productivity growth may constrain future economic growth.
