Although the government’s latest unemployment report shows the jobless rate dropped in December, economists are questioning how much of the drop in unemployment is because of “discouraged workers” who have given up trying to find jobs.
Although the government’s latest unemployment report shows the jobless rate dropped in December, economists are questioning how much of the drop in unemployment is because of “discouraged workers” who have given up trying to find jobs.J. Scott Applewhite/Associated Press

The December jobs report has sparked a fresh argument on an issue as old as the recovery: whether unemployment is dropping because of new jobs or because people have stopped looking.

The government’s latest jobless report showed the unemployment rate fell to 6.7 percent. But it estimated the U.S. labor force shrank by 347,000 last month while only 74,000 new jobs were added. Just 62.8 percent of adults were working or sought jobs, tied for the lowest share since 1978.

For the year, the labor force shrank by nearly 550,000 workers to about 154.9 million – marking only the third year since 1948 when the U.S. workforce declined on an annual basis.

To skeptical economists such as Keith Hall of George Mason University, that means all of 2013’s drop in the unemployment rate was because fewer people were looking. Only 2.2 million jobs were added last year.

But a group that includes leading Wall Street and Federal Reserve economists says the drop in workforce participation is about demographics not the health of the economy. Mostly, it’s about baby boomers.

About 76 percent of those leaving the workforce in 2013 last year represented people older than age 55 who say they don’t want jobs, the Labor Department estimates.

“Arithmetically, the boomers will keep pushing (participation) down for another 15 years,” said Dean Maki, economist at investment bank Barclays, who argues boomers’ retirements mean current job growth can reduce unemployment. “We should get used to it.”

Indeed, participation began dropping years before the recession, and U.S. labor-participation rates are still higher than in most developed economies.

In 1948, 59 percent of adults were in the work force. The rate surged as boomers grew up, and the percentage of women who worked nearly doubled, peaking at 67.3 percent in 2000.

A decline in “discouraged workers,” who have quit looking because they think they can’t find work, also points to economic confidence, Brookings Institution economist Justin Wolfers said. Discouraged workers have dropped by 151,000 in the last year to 917,000.

Even among workers too young to retire, it’s not clear the economy is inducing many to leave the job market, Maki said. Other reasons include staying in school or family responsibilities. The number of 25- to 54-year-olds out of the labor force who want to work fell by about 90,000 in the last year, to 2.7 million. Among 16- to 24-year-olds, those out of the work force but who say they want a job dropped 14 percent to 1.8 million.

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