There was some big news today on August unemployment. Approximately 169,000 jobs were created during the month and the unemployment rate dropped. On the surface, the jobs number was lower than forecasted, but the decline could be seen as a good indicator. Taken alone, the lower rate could also have been seen as a good sign.
However, when you look below the top line numbers you see some very bad trends. The labor force participation rate — the percentage of people over 16 who either have a job or are actively searching for one — fell to 63.2% in August. The last time it was that low was in August of 1978. What this means is only 63% of people of working age… were actually working (or looking). During the month of August, over 300,000 people decided to leave the ‘official’ workforce.
The percentage of people in the work force, in the latter half of the 20th century, had been rising. The rate rose steadily for decades as more women were entering the workforce, eventually peaking at 67.3% in 2000. But the number has been on the decline ever since — a trend that was accelerated by the Great Recession. There are now 90.5 million Americas who don’t work and are not counted as part of the ‘official’ labor force. This excludes kids under the age of 16 and non civilians such as those in the military or in prison, but includes just about everyone else.
Many of them are either retired or are high school or college students, according to the Labor Department. But the other 40 million or so aren’t trying to find work for a variety of reasons — they might be rich, they might stay home with kids or relatives, they might be disabled, or they might simply have given up looking for a job.
What this means that a smaller chunk of the population is paying for promised entitlements such as Social Security and Medicare. It also means fewer people are paying taxes and contributing to economic growth.
While I don’t have numbers to substantiate it, I believe a large number of these people have only left the ‘official’ workforce, which means they are not paying social security or medicare taxes, they are not paying state or Federal income taxes and they are are still working! They have just decided to work as part of the underground economy. In doing so, they put more money in their own pockets today and ignore the impact on the future and the economy as a whole.
We as Americans like to stay busy and work. I truly believe that a majority of those 40 million people are ’employed’ somewhere, they are getting paid ‘cash’ and avoiding the ‘taxes’ and fees that everyone that is part of the official economy are paying. People are working as babysitters, doing yard work, collecting deposits on thrown aways bottles and cans, they are fixing cars out of their garage, doing manual labor after being pickup outside Lowes or Home Depot. They are cleaning pools, painting houses, selling things on Ebay, they are playing poker online and so many other things to make money. They are supporting themselves and putting more money in their pockets. People like to stay busy and they need money to support themselves and their family. Most of those 40 million people are working.
I am not sure the solution to this problem, other than millions of high paying jobs. In order to make more of these jobs part of the ‘official’ workforce, we would need to significantly cut taxes and create incentives for people to want to be a part of the official economy. This is very difficult. We could also significantly increase enforcement… so that there are very very painful penalties if you are caught working in the underground economy. More enforcement is expensive and will make people angry.
There will always be people working in the underground economy, however, the government must do everything possible to create good jobs and incentives so that people want to work in the official economy, so that they want to pay taxes and contribute to Social Security. We need more working people participating in the official economy.