Buying Quality Performance

Friday 4^th May saw the publication of April’s employment figures for the US. They show a slight, but welcome, decline in unemployment, from 8.2% to 8.1%[1], which is the lowest rate for three years, as well as jobs growth for the 26^th month in a row. These represent a marked difference to similar measures in Europe. However, they also raise a number of significant questions about the future shape of the US labour market, and opportunities for long-term recovery and growth.

There are some worrying underlying trends for people out of work: 42.5% have been unemployed for over 26wks, and once people are out of work for over a year their chances of returning to the labour market are less than 10%. There is considerable data from earlier recessions showing the long-term scarring effect of such unemployment – people’s ability to earn is unlikely to ever recover.

Furthermore the Labor Force Participation Rate (LFPR) actually fell between March and April by over 300,000 people – that’s 300,000 people fewer people working and spending their earnings. The unemployment rate fell despite this because it measures people actively seeking work, and significant numbers of people are leaving the US labour market with no immediate plans to attempt to return, they are becoming ‘inactive’.

The Federal Bank of Chicago recently published a letter that explains the decline in the Labor Force Participation Rate. In this the authors make the case that just under half of the LFPR decline from a peak of 67.3% in the early 2000s to 64% in December 2011 was for reasons of demography – primarily baby boomers nearing retirement age. Indeed Betsey Stevenson, Economics professor at Princeton and former Chief Economist at the US Department of Labor, tweeted a similar explanation:

The Hamilton Project, a Washington based policy organization, recently published a paper on the ‘jobs gap’. This is a term they apply to the number of jobs the US economy needs to create every month in order to return to pre-recession employment levels. If an average of 208,000 new jobs are created every month it will take until 2020 for this to be achieved. And even at this rate of expansion, this result will mean an LFPR of under two-thirds of the available population. (The UK was at 70% in 2010 and comfortably over 70% pre-recession.)

There are significant numbers of ‘inactive’ people in the US labour market. They are measured as part of a wider unemployment measure known as U6, which currently stands at 14.5%. As we have seen some of this can be put down to demographic changes, but there is less clarity as to why some groups are becoming disconnected from the world of work. At a time when other countries are introducing measures to reduce the level of inactivity within their labour markets – primarily through changing requirements for claiming disability and single parent benefits and increasing retirement ages – it is unclear how the US will be able to afford such a low LFPR.

The good news is there are a number of ways in which the LFPR could be improved. The key lesson from previous periods of high unemployment is that detachment from the labour market becomes more entrenched when people out of and on the edges of work do not engage in meaningful activity. A sustainable reduction in unemployment requires a coherent approach that keeps people engaged and active, ready to move into work when opportunities arise or can be made.

The question is not simply how you retain more people in employment, or even just programmes to support the transition back to work, but also how you ensure people not currently in employment see themselves as part of the future labour market. Mathematica Policy Research have published some robust papers outlining how the structure of disability insurance works to keep claimants out of the labour market once they become unemployed, rather than providing incentives for them to rejoin. Improving the commissioning, provision and funding of adult skills and how it interacts with welfare-to-work support also needs to form part of the solution.

Of course, underpinning a transition to more activation and more participation is the issue of cost, particularly at a time when Government spending is under such scrutiny. This question needs to be framed in terms of whether the US can afford the level of labour market attrition it currently has, and how sustainable it is to have significant levels of working age people disengaged from meaningful activity. When the future cost of low LFPR is considered, the cost of early intervention looks very different.

The costs of unemployment are high – benefits claimed are the mere tip of an iceberg that includes health, crime and intergenerational effects. There has been considerable work undertaken in the UK on how future savings can be used to fund current labour market interventions. Some detail is laid out in our paper on the target accelerator.

Increasing the LFPR may not seem like a priority given the current economic situation, but a failure to invest in keeping people connected to the labour market now will surely slow recovery and hamper opportunities for future growth.