Why full U.S. employment doesn’t include millennials

They want to work, but they need a hand onto the great American ladder of opportunity.

Aggregate unemployment has been hovering at 5%, a huge turnaround from 9.5% at the bottom of the most recent recession. Thus the U.S. is at or close to full employment.

Lots of people — some of them quite smart — believe this. Unfortunately, they are mistaken.

For the U.S. to achieve “full employment,” our economy would have to generate more than 260,000 jobs per month, for four consecutive years, to match the peaks of recent expansions.

Instead Wall Street forecasts have trended in the 180,000-230,000 range, but lower reports are the norm: On Oct. 7, the U.S. Bureau of Labor Statistics announced that total nonfarm payroll employment rose by 156,000 in September 2016, 149,000 net of revisions. Monthly job growth has averaged 178,000 per month this year, compared with 229,000 in 2015.

The unemployment rate, 5%, and the number of unemployed persons, 7.9 million, have shown little net change since August 2015. Since June 2009 the share of the adult population with a job is up only marginally, 59.8% compared with 59.4%.

The primary factor underlying these disappointing figures is labor force participation rates among younger workers, under age 35, which have fallen precipitously in recent years. The millions dropping out of the labor force are not retiring, nor are all incapacitated or unable to work. No, these noticeable declines reflect a paucity of viable employment opportunities.

Good jobs are not as available to millennials — college educated and not — as they were to previous generations. Much is made of “the gig economy” giving workers flexibility in job choice, but most millennials want to work full-time, just as badly as their forebears, yet they cannot get hired for similar situations. Thus many of them have gone back to school or moved in with their parents or friends. They are subsisting, but neither they nor the economy is thriving.

These are the younger Americans Hillary Clinton said “are living in their parents’ basement.” (Truly for some.) They formed the core of Bernie Sanders’s support. Donald Trump points to them and says our high employment statistics cannot be trusted, and he’s right.

The reason the U.S. unemployment rate is down sharply since 2009 has much to do with the construction of the rate itself. Unemployment rates do not merely count adults without a job. They count adults without a job who are actively looking for work. Unemployment has declined in large part because prime-age Millennial adults have been dropping out of the labor force in droves.

Along these lines, “under-employment” totals about five million American workers, roughly 1.8% of the adult population and about 3% of the labor force.

Only 62.9% of adults are deemed currently to be in the labor force, compared to 66.4% in 2006 and 67.4% in 2000. This decline is well-recognized among economists and policymakers, commonly attributed to the advance of Baby Boomers into post-55 age groups.

The greying of the American workforce, however, can only explain a fraction of the declines in labor force participation. Post-55 year old Americans are more active in the workforce than at any time in post-World War II history. Whether caused by better health, inadequate savings for retirement or other reasons, baby boomers are working longer and delaying retirement.

Some Americans at the end of their careers are holding on to jobs that could be filled by those beginning them. Are we facing the advent of a generational conflict?

While U.S. Federal Reserve commentary on the economy has been ebullient, its policy actions have been much more cautious. The Fed’s full perspective on the economy is unstated, but most watchers (including we at Western Asset) believe it recognizes and understands the problems underlying employment. We consequently expect Fed rate hikes to be halting and sporadic. But the Fed has no levers to push to create a quick fix. It will require sustained economic growth at roughly twice the levels the U.S. has now, and more than quadruple what most of Europe has.

As usual, the solution is obvious: we need the U.S. economy to grow at a higher rate, creating more good jobs for everyone, and younger adults in particular. That’s really hard to achieve.

We know our presidential candidates recognize the issue. The best place for the next president to start may be to encourage ways to employ more millennials. They want to work, but they need a hand onto the great American ladder of opportunity. The risks are a continuing sputtering U.S. economy — and a lost generation.

Michael Bazdarich is an economist with Western Asset Management.