Is Baby Boomer Retirement Behind the Drop in the Unemployment Rate?

July's official unemployment rate and our more inclusive "Solman Scale U-7" rate decreased, but why?

By Paul Solman

The simple story of the July unemployment numbers, released Friday, is that the population grew by about 200,000 people and new jobs absorbed just about all of them.

Why did the unemployment rate go down -- from 7.6 percent to 7.4 percent? Because the official "workforce" actually declined -- by about 40,000 people. What could explain the drop, given the rise in population? "Ten thousand baby boomers turn 65 today" has become a demographic cliché (or meme, if you prefer). Barring a mass and age-selective plague, that means that 10,000 or so are also turning 66, their official Social Security retirement age. Many, if not most, baby boomers are retiring. And since 10,000 a day equals 300,000 a month, if two-thirds of them are hanging up their rock 'n' roll work shoes, Friday's numbers would make sense: 200,000 or so retirees offsetting the 200,000 or so new working-age Americans.

I have long warned against making too much of any one month's unemployment numbers. But the story told above is plausible, if not provable.

As for our own more inclusive measure of under- and unemployment, the Solman Scale "U-7," it nudged down from 16.3 percent to 16.15 percent. It adds to the part-timers and "discouraged" workers in the government's official accounting of the underemployed everyone who tells the Bureau of Labor Statistics that they want a full-time job but can't find one. Thus, it includes people who haven't looked for work in the past 12 months -- people the government drops from the workforce entirely. U-7 treats these people as super-discouraged.

July Solman Scale

The drop in the U-7 would also make sense. On the negative side of the ledger, a slight shrinkage in the workforce was matched by the same number of people "not in [the] labor force" reporting they "currently want a job."

A plain English interpretation: the 40,000 new discouraged Americans who passed the one-year mark in which they hadn't looked for work were no longer counted in the labor force, which consequently dropped by about 40,000. On the positive side, 200,000 or so fewer are unemployed.

The headline-trumpeted gain of 162,000 new jobs -- mainly in retail, hotels and restaurants -- was characterized as "Continuing a Tepid Run" by the Wall Street Journal, "sluggish" by the New York Times, "below expectations" by the Financial Times, and "less than forecast" by Bloomberg News. Moreover, the total number of new jobs was offset by downward revisions of 26,000 for May and June.

JUNE'S UNEMPLOYMENT NUMBERS: Boffo BLS Jobs Data! But -- the New Jobs Are Only Part-time

Most discouraging of all perhaps is that average hourly earnings actually dropped in July or, as the Bureau of Labor Statistics press release put it, "edged down by 2 cents to $23.98, following a 10-cent increase in June." Nominal wages almost never drop, especially when there's inflation, as there is at the moment.

So a story consistent with this month's data: new workers are entering the labor force at lower wages while higher-paid baby boomers retire. NewsHour producer Diane Lincoln Estes recently spoke with the Economic Policy Institute's Heidi Shierholz, who reflected on what this means for new workers entering the labor market for the first time:

One group of people that immediately jumps out as being hit hard by this (persistent unemployment) are new entrants to the labor market -- new high school and college grads who are trying to start their careers. Entering a labor market, into a scene like this one, where job opportunities are very weak, the research suggests you're actually going to have lower lifetime earnings.

If your employer knows that you don't have a lot of outside options for jobs, that you're not going anywhere, they have very little incentive to pay you very big wage increases. ... They don't have to pay big wage increases to keep the workers that they need, so that elevated unemployment year, after year, after year, just puts this downward pressure on wage growth for even those people with jobs. ...

The kind of job growth that would make us feel that we were in a really strong jobs recovery would be on the order of 300,000 jobs a month. ... If we were getting 300,000 jobs a month, we would get back to health in the labor market in about 3 years. ... As it stands now, we're headed in the right direction, but it's going so slowly that we are still going to have years and years of elevated unemployment.

Check out the Atlanta Fed's job calculator, from the Center for Human Capital Studies, to see when we could reach full employment.

As for especially hard-hit sectors that we have focused on in the recent past: manufacturing showed no job gains and hasn't for a year. (See our "Man vs. Machine" segment on the plight of manufacturers). Interestingly, there were no jobs gain in health care or government.

The joblessness rate for teens ages 16 to 19 actually went up ever so slightly, though their official unemployment rate edged down, suggesting that more teens, like their elders, simply stopped looking for work altogether.

And for African-American teens, a demographic on which we've also been focusing on Making Sen$e? Their official unemployment rate is 41.6 percent. For more on the challenges youth -- and especially inner-city youth -- face finding employment, see our two segments below.

Watch Video

In our first Making Sen$e report on youth unemployment earlier this month, we examined obstacles inner-city youth face to finding jobs.

Watch Video

As reported in this week's Making Sen$e story on youth unemployment, the number of jobs available to 16- to 19-year-olds has decreased by half since the 1990s.

This entry is cross-posted on the Rundown -- NewsHour's blog of news and insight. Follow @paulsolman