THE UNEMPLOYMENT RATE, DISCOURAGED
WORKERS, and RETIREMENT
By Oded Izraeli and Kevin J. Murphy*
On Friday, April 5, 2013, the Labor Department announced that the
unemployment rate fell to 7.6% for the month of March. In addition,
they reported that, though 88,000 new jobs were created, the labor
force nevertheless shrunk in March by almost 500,000 workers. News
analysis following the Labor Department announcement spun the drop
in the unemployment rate as reflecting weakness in the labor market,
attributing the drop to “discouraged workers.”
Discouraged workers are individuals who want to work but have
given up active job search because they don’t believe a job exists for
them. They are not counted in the official labor force. If more
individuals become discouraged, as happens in a recession, then the
number of officially tallied people counted as unemployed is artificially
understated.
Attributing the March decline in the unemployment rate to a
discouraged worker phenomenon suffers from a problem of logical
consistency. We note that the same Labor Department report shows, in
the fine print, a substantial decrease in discouraged workers in the
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month of March (dropping by 82,000 individuals, an almost 10%
decrease). The fact that the number of discouraged workers actually fell
during the period squares with the simple reality of where we are in the
business cycle—we’re in a recovery. It makes no sense to argue that
workers all of a sudden decided to leave the labor force in March
because they gave up on the opportunity to find a job as the economy
recovers!
We suggest that, in order to understand current developments in
the labor market, one ought think about two other markets--the stock
market and the housing market. Regarding the stock market, the Dow
Jones Industrial Average surpassed 14,000 in March, which can be
viewed as a completion of the recovery from the low level of about
6,500 reached back in early 2009. Economic considerations drive the
retirement decision for most workers. With the widespread transition
to defined contribution pension plans that occurred over the last thirty
years, the weak stock market of the last decade caused many individuals
of retirement age to defer retirement. In other words, workers retire if
and when they believe that they have enough future income in their
retirement funds to satisfy future needs and wants. With the recovery
in the stock market, workers that previously wanted to retire but were
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unable to do so now feel wealthy enough to finally exit the labor force.
The weak economy of the last six years created a pent-up demand for
retirement and we should expect to see these folks leave the labor force
quite voluntarily as the economy improves, retirement being their
preferred choice.
A second market that influences retirement decisions, perhaps
surprisingly, is the housing market. Housing, like retirement savings
and pension funds, is an important source of wealth for many
Americans. The last few years saw the housing market in serious
trouble because of significant drops in prices and the tremendous
difficulty home owners had selling their homes. The recovery in the
housing market in the last few months, makes it easier for workers to
retire. With the housing market in the doldrums during the Great
Recession, some individuals who were otherwise ready to retire,
prolonged their membership in the labor force because they were
unable to sell their house and move off to the greener pastures of
Florida or other retirement havens. Like the weak stock market, the
weak housing market induced an overhang of individuals in the labor
market that is now being worked off with the rapidly improving market
for houses. Improved conditions in the housing market, in terms of price
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and time to execute transactions, have strengthened the incentive to
retire.
The recent statistics on the decline in the labor force have little to
do with a discouraged worker effect. The Labor Department numbers
belie this possibility and an increase in discouraged workers at this
point of the recovery defies logic. It is, instead, our contention that
more workers have chosen to retire recently because of the increased
value of their retirement funds (and other savings) as well as the strong
improvement in the housing market.
*The authors are both Professors of Economics at Oakland University in Rochester,
Michigan.
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