Men Without Work 

On the first Friday of every month, Wall Street obsesses and generally overreacts to the Non-Farm Payroll and Household Survey employment releases. Never mind that employment is a lagging indicator of economic activity. Never mind that the data is often revised massively by the Bureau of Labor Statistics months in the future. Never mind that there are better and more frequent measures of employment trends such as the Weekly Jobless Claims data. While I have long regarded this monthly ritual as an absurd reflection of CNBC quasi-financial entertainment, I admit that I have also fallen into the trap of obsessing and overreacting to a specific component of the report: the Labor Force Participation Rate or LFPR.

LFPR matters because one area of focus for me is wage growth and trying to better understand the potential persistence of the existing worker shortage in the US. I have researched and written extensively about other contributors to our worker shortage such as aging demographics, falling immigration, deglobalization as well as anemic productivity growth. The labor tightening impact of all those factors could be overcome if we could just see LFPR move meaningfully higher given the sheer number of men not in the labor force. Well, I now understand just how unlikely that is. 

To better understand the dynamics behind LFPR, I recently read Nicholas Eberstadt’s book, “Men Without Work”. Eberstadt is a Harvard PHD Economist who is affiliated with the conservative leaning American Enterprise Institute. The point of the book is to try to explain why the workforce participation among prime-age men (25-54) has steadily and consistently fallen since the 1950’s as illustrated in the chart below.

Every month recently we hear from pundits and Fed officials discussing the incredible tightness of the labor market with an official unemployment rate at only 3.5%. That 3.5% statistic includes everyone in the labor force which means people who are either employed or looking for a job. However, it excludes the tens of millions of Americans that are neither employed nor looking for employment.

Relative to other OECD countries, Americans on average, work longer hours with less vacation than in these other advanced economies. Unfortunately, there is an inexorably growing cohort of men who simply do not participate in the economy. 

As the chart below shows, women are doing their part with their participation rate only slightly below where it peaked around 2000 and aging demographics explain more than all of that decline. It is important to note that the growth of women in the labor force had been an important driver of the great disinflationary growth Americans enjoyed from the 1980’s to prior to the pandemic as women added to the labor supply thereby allowing companies to grow without squeezing employment costs higher.

Eberstadt’s work illustrates that this falling male LFPR is undeniably a contributor to the worker shortage we are now experiencing. He writes, “The NILF (Not in the Labor Force) group has remained the fastest growing component of America’s prime-age population. Between 1965 and 2022, it grew nearly three times as fast as the male population and almost three and half times as fast as the prime-age male labor force.” “Between January 2000 and April 2022, work rates for Americans twenty and older ratcheted lower with each new recession. Had overall adult work rates held at the 2000 levels, an additional 10 million Americans would be in paid labor today…Since the end of 2020, the number of unfilled jobs in America has exploded, yet worklessness among prime-age men has remained almost unchanged.”

What I take away from all of this is that these are long and enduring trends and there is nothing in recent history that would suggest that men, young and old, that are not in the labor force are going to start coming back in. Many of the factors that Eberstadt believes precede men not participating in the workforce are predictable issues like dropping out of high school, incarceration and falling family formation rates and none of those trends are going in the right direction. One interesting thing to note is that as much as twenty percent of these men are actually college graduates. I assume some of them benefit from family wealth but certainly not the majority. I will spare you the sociological theories that attempt to explain that cohort.

The bottom line is that the US worker shortage is secular as is the decline in the LFPR which means that outside of recessions, including the impending recession, the US economy is going to struggle to attain meaningful non-inflationary growth. For financial markets, the ever-present threat of wage inflation means that the “Fed put” is not going to be in play for a very long time. 

For more from Tim, follow his podcast The Weekly Bull and Bear wherever you listen to your podcast or read his weekly blog posts here.

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