Why Are Americans Fleeing the Job Market?

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Are we about to see a wave of Americans giving up on the labor market?Are we about to see a wave of Americans giving up on the labor market? The Bureau of Labor Statistics' June jobs report saw the labor market lose 652,000 workers -- a defection so large that it caused the nation's unemployment rate to drop from 9.7% to 9.5%, not because jobs were created, but because the number of people in the workforce declined.

In fact, workers left the labor force so fast that they seem to have bypassed categories the unemployed usually fall into before they finally leave the workforce due to frustration. The number the government uses to track discouraged workers -- those who have given up the job search but are still interested in work or are working part-time in search of full-time employment -- declined in June to 16.5% from 16.6% in May.

If most of the fleeing workers didn't come from the discouraged or part-time workers, where did they come from and why are they leaving?

Temporary Census Jobs Ended

A major portion of the answer comes from the 225,000 temporary census workers who may account for a large part of the people leaving the workforce because these were once-in-a-decade temporary jobs that aren't coming back. IHS Global Insight chief U.S. economist Nigel Gault said that many already discouraged or retired workers may have landed census jobs understanding the temporary nature of the positions from the outset.

"If you were a census worker who had no interest in staying in the labor force, then that would take you straight out of the employment market," said Gault. When the jobs ended, "You wouldn't be part-time or discouraged, you'd just be gone."

Slowdowns in housing and manufacturing, two industries that also hire a lot of temporary workers, might also have contributed to the worker exodus in June. Housing starts fell after having picked up steam in the first quarter as people rushed to get in on the first-time home buyer's tax credit, which expired in April. And surprisingly, the pace of manufacturing growth has slowed after it had ramped up in the first quarter.

Unemployment Benefits Exhausted

The larger problem may lie with long-term unemployed people finally exhausting their unemployment benefits. Gault notes that economic conditions have deteriorated significantly since April, leading many people to have less confidence in the job market. Congress failed to extend unemployment benefits for 1.2 million Americans in June, and with Republicans seemingly determined not to extend benefits again prior to the November elections, some workers may be leaving the labor market altogether. As more people lose their benefits, more people may leave the workforce out of frustration.

"There may well be people who are no longer receiving [unemployment] benefits, who previously were declaring themselves in the labor force and looking for work, but now are saying they are not in the labor force," said Gault.

If a major trend of workers leaving the labor force develops, it would hurt the economy. With large numbers of workers unable to receive unemployment benefits, other workers may lose jobs because less money is being spent on goods and services nationwide. With demand slowing down and financial conditions deteriorating, companies across all industries that may have been considering expansion and hiring plans will place them on hold.

More Applications for Food Stamps

State and city governments would also begin seeing increases in people applying for food stamps and other aid programs at a time when many states are trying to close their budget deficits.

While there is no clear indication of a trend yet, the situation does deserve monitoring. The numbers in the labor report didn't indicate that workers are joining the self-employed or are starting their own businesses in increasing numbers, so positive explanations for the worker flight are in short supply.

The one good thing is that the workers could reappear as quickly as they left, but that will only happen when the labor market sends real signals that it's serious about creating new jobs.
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