Is This Why Labor Participation Rate Looks So Bad?

SMITH BRAIN TRUST – Is the growing gig economy skewing the national labor market participation rate?

Quite likely it is, says Phillip Swagel, a senior fellow at the University of Maryland Robert H. Smith School of Business Center for Financial Policy and a professor of international economic policy at UMD's School of Public Policy.

He says the talented staff at the Bureau of Labor Statistics and other government statistical agencies are working to keep up with the changing economy, but that growing numbers of people working short-term and freelance jobs as part of the gig economy inevitably may "lead to fuzziness in what have been clear distinctions in our labor statistics."

The unemployment rate has returned to pre-recession levels, but analysts nonetheless remain concerned about the stubbornly low labor force participation rate. They point to that metric as an indication of underlying weakness in the job market and the overall economy.

Labor-force participation, or the share of American civilians 16 or older who are either working or actively looking for work, has been on a downward trend roughly since the start of the millennium. Part of this is simply demographic change, as aging baby boomers are retiring from the workforce in huge numbers.

Economic factors also influence participation trends. The steepest declines in participation coincide with the 2008 financial crisis and the recession that followed, suggesting a cyclical component to participation. In recent years, the rate has mostly leveled off. Millennials and formerly discouraged workers are joining the workforce, keeping the participation rate at about 63 percent.

Still, the participation rate remains at lows not seen since the late 1970s, as millions of people opt to sit out. Or so it seems. A challenge for the statistical agencies is that it could be that some of these supposedly idle adults are instead earning extra cash in ways not envisioned just a few years ago. For example, it could be that people driving for Uber or Lyft, renting out rooms on Airbnb, selling handiwork on Etsy, or doing some other payment-by-task job do not think of themselves as in the labor force.

The participation rate was at 62.7 percent in May, down from April's 62.9 percent. In 2000, it was above 67 percent.

"In principle," Swagel says, "gig workers should be counted properly in the participation rate but the rise of these new work arrangements could matter."

Independent workers' numbers have never been precisely counted in government statistics, experts say. Intuit, parent of TurboTax software, estimates that at least 34 percent of the U.S. labor force already works this way. And by 2020, the company says, at least 43 percent will. Other economists say it will be even higher, at 50 percent.

"The rapid growth of the largest platforms suggests we have only just begun to see their impact," McKinsey wrote last year in a report. It estimated that there were as many as 68 million people in the United States who are piecing together different income streams and working independently, rather than on a specific employer's payroll.

The participation rate is measured from the household survey, by which the Bureau of Labor Statistics contacts individuals to ask whether they are employed, looking for work, not looking for work, working part time when they want full time, and so on. It doesn't specifically gauge the number of people with gig or freelance employment.

Someone working in the gig economy might say they are employed or might say they are looking for work, and in either case they would be counted as "participating" in the labor force. But they might also say they aren't working and they aren't looking for work, perhaps because a freelance project just ended and they haven't begun looking for the next. Maybe they are content to drive for Uber for now, rather than pursue the next thing.

"In principle, someone working at a gig job who prefers to find full-time work would show up as participating in the labor force," Swagel says. "But it could be that someone who works only a little bit answers as if they are not working."

"In other words," he says, "the gig economy could introduce shades of gray."