The Jobs Crisis for Younger Workers

New college grads can’t get a break

Another half million Americans left the labor force in March, and the labor force participation rate for people aged 20 to 24 declined by six-tenths of a percent, compared to two-tenths of a percent for the labor force as a whole.

Young people have the lowest labor force participation rate — the fraction of Americans employed or looking for work — since 1972. They are hurting.

So it was disappointing to hear Nobel Prize winning economist Paul Krugman, a New York Times columnist, tell David Stockman on last Sunday’s ABC news program "This Week" that the gradual decline in the labor force participation rate is caused by the aging of the workforce.

"About half of the decline in labor force participation that we’ve seen is, in fact, just demographics…. The fact of the matter is it’s not just people hitting 65 but people often tend to retire before then so the numbers are not that bad," Krugman said.

Wrong, Mr. Krugman. Americans 65 and over, and 55 and over, are doing far better than the rest of the labor force. Labor Department data show that the labor force participation rate is not declining due to an aging population — older folks are staying in. It’s declining due to young people dropping out.

Youth unemployment is a serious matter, and not just for the young.

A society that doesn’t offer young people work opportunities will spend more on payments for income support. It will see more crime, as young people "hang out" on the streets. Hard-won college degrees will atrophy. The vaunted American work ethic admired by Alexis de Tocqueville will slowly wither.

Since 2000, the labor force participation rates of workers 65 and over have been rising steadily, along with rates for those aged 55 and over. In contrast, the labor force participation rates of workers aged 16 to 54 have been declining. The biggest decline in labor force participation rates can be observed for workers aged 16 to 24.

Over the past 10 years, employment has increased among Americans 55 and over by 9.3 million. At the same time, it has declined by 25,000 among those aged 20 to 24. (See Figure 1.) It has also declined by 3 million in the 25 to 54 age group.

The labor force participation rate of seniors has increased by 4.8 percentage points from 2003 to 2012, yet declined in other age groups. (See Figure 2.) Both men and women saw increases in labor force participation rates.

Unemployment rates are lowest for the 55+ age group and have seen the smallest increase. (See Figure 3.) Older Americans have seen unemployment rates rise by 1.9 percentage points over the past 10 years. In contrast, unemployment rates have risen by 3.3 percentage points for the 20 to 24 age group.

The unemployment rate in 2012 for newly graduated men and women with bachelor’s degrees was 8%, far higher than the 5% rate such young adults experienced in 2006. The effects of the recession have fallen most disproportionately on them.

Krugman seems to have the demographics precisely backwards. It’s not that retirement and aging are causing the decline in the labor force participation rate. Rather, the increase in labor force participation among the 55+ group, combined with policies that stifle job growth, are making jobs scarcer for younger workers. No retirement, no openings for lower-level workers. This leads the young to become discouraged and drop out of the labor force.

Youth unemployment rates not only suggest personal disappointment, but lasting consequences. A new paper in the American Economic Journal Applied Economics found that graduating in a recession leads to earnings losses that can last for 10 years after graduation. They find that "the lowest skilled graduates appear to suffer permanent effects."

The authors, University of Toronto economics professor Philip Oreopoulos, Columbia University professor Till von Wachter, and economist Andrew Heisz of Statistics Canada, found that earnings losses are greater for new entrants to the labor force than for existing workers, who might see smaller raises, but who have jobs.

In addition to higher unemployment rates, large increases in college tuition in recent decades mean that young people are graduating with substantial debt, an average of $26,000 in 2012.

That is one reason why rates of recent graduates living at home with either a parent or grandparent have increased. In 2005 the share of 20-24 year olds who had at least a bachelor’s degree but were living at home was 36%, and it reached 43% in 2011.

In 2011, the Pew Research Center issued "The Rising Age Gap in Economic Well-Being," which concluded that the gap in well-being between the young and the old is greater than ever before. Older Americans are doing better than in the past and younger ones doing worse.

This piece originally appeared in WSJ's MarketWatch

This piece originally appeared in WSJ's MarketWatch