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Why Unemployment Is Worse Than You Think

Tuesday, December 13, 2011

The widely quoted unemployment rate misses an important factor: demographics.

The current unemployment rate of 8.6 percent hides the extent of the economic crisis. The widely quoted rate misses not only the under-employed and discouraged workers, but also major demographic factors.

The large demographic shift that has taken place over the last few decades—driven by the maturing of the baby boom generation—now places considerable downward pressure on the unemployment rate, which makes the current malaise look a bit better than it really is.

As people (especially men) age into their thirties and forties they tend to hold onto jobs for longer, in part because they’ve usually acquired a modicum of useful skills and education, as well as a host of familial obligations that make working somewhat of an imperative. As a result, the unemployment rate for 30-somethings and 40-somethings tends to be quite low.

People in their late 40s to early 60s are more likely to respond to layoffs by taking themselves out of the market entirely.

As these same 30- and 40-somethings advance into their late 40s to early 60s, they are not only less susceptible to being laid off than younger workers but are also more likely to respond to layoffs by retiring and taking themselves out of the market entirely. This makes them non-entities when it comes to measuring unemployment. In times of recession, this outcome becomes even more common as companies seeking to cut costs may offer early-retirement and buy-out packages to their older and more expensive employees.

The Great Recession also may not be seeing the normal boost in the unemployment rate from teenagers and 20-somethings. In the face of a poor job market many young workers—who are less likely to have as many domestic and financial commitments as their comparatively older counterparts—are more inclined to stay in school to broaden their skills before entering the workforce, or to return to school for advanced degrees rather than tread water in a disagreeable job.

Economists attempt to account for these demographic forces by using a measure called the D.O.U.R.—or the Demographically-Adjusted Unemployment Rate. Recent work by Marianna Kudlyak, Devin Reilly, and Steven Slivinski of the Richmond Fed suggest that the demographic factors present in today’s economy may be suppressing the unemployment rate as much as 1 percentage point—meaning that without the current mix of old and young people we would be facing an unemployment rate nearing 10 percent.

As people (especially men) age into their thirties and forties they tend to hold onto jobs for longer.

In the 1970s and 1980s, demographics increased the unemployment rate as baby boomers surged into the labor market, accompanied by an unprecedented number of women (who were, unlike today, largely unskilled). The sheer amount of young, unskilled people looking for jobs kept the unemployment rate higher than it otherwise would have been for two decades until the last of the boomers reached their 30s in the mid-1990s and women rapidly progressed in terms of skills and education.

The demographic effect we see suppressing the unemployment rate today will slowly dissipate as the baby boomers retire. And when this time comes we will either need to come to grips with a higher natural unemployment rate—which is not by itself a disaster—or else think more creatively about how to make young people’s transition into the job market easier.

But the fundamental short-term implication of factoring demographics into the equation is that, but for the plethora of aging boomers on the verge of retirement, the overall economic picture would be even worse.

Ike Brannon is director of economic studies at the American Action Forum, where Matt Thoman is coordinator of economic studies.

FURTHER READING: Brannon also writes “The Upside of Voter ID Initiatives” and “Who Really Stands to Win in the Union Fights?” Brannon and Matt Thoman coauthor “European Disunion.” Kevin A. Hassett contributes “The Long Gray Unemployment Line.” Alex Brill discusses “Responding to the Recession: The Challenge for Unemployment Insurance.” Robert J. Barro describes “The Folly of Subsidizing Unemployment.”

Image by Rob Green | Bergman Group

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