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Why are people leaving the workforce?

America's jobs picture is seeing huge improvement, with robust numbers that are giving investors confidence in the economy. The U.S. added 248,000 jobs last month, bringing the unemployment rate below 6 percent.

But one part of that picture is still a puzzle: People continue to stop looking for work, and in doing so, are dropping out of the labor pool. In fact, the participation rate in the labor force has fallen to 62.7 percent -- its lowest level since early 1978.

How can this be? As the job market heats up and the unemployment rate falls, wouldn't that mean more people are looking for work, not less?

"The decline is without precedent," Bob Funk, chief executive of global staffing company Express Employment Professionals, told CBS MoneyWatch. Government tracking of employment statistics go back to 1948, he said, "and a decline like this has never happened since then."

There's no clear reason why people are leaving the workforce, and the issue has ignited a fierce debate among economists. One trend that they seem to agree on? About half of the decline is due to baby boomers entering their retirement years.

The other half of the decline gets a little fuzzy. Funk notes that some portion of the unemployed either don't want to work or don't think they can find a job. His company commissioned a poll of the unemployed in May, he said, and found that 47 percent have completely given up looking for work. "That's a real problem," he said.

The labor force participation rate was around 66 percent of the population in 2007 before falling to 62.7 percent.

Some economists say the expansion of food stamp and disability programs are keeping people out of the labor pool. Others says that young people are dropping out, partly because more are going to college and partly because the ones who aren't are getting crowded out of the job market.

The recession drove many out of the workplace, and there aren't enough job opportunities to bring them off of the sidelines, says Chad Stone, chief economist with the Center on Budget and Policy Priorities.

Don't expect the rate to rise anytime soon, say researchers at the Federal Reserve Bank of Cleveland in a recent paper. They're expecting further declines over the next decade or so. The youngest baby boomers are still in their early 50s, the researchers say, so boomers will be dropping out of the job market for years to come.


On the plus side, the researchers said, those job openings created by retiring baby boomers could open up more opportunities for younger adults and less-educated workers.

So what's the long-term impact of a falling participation rate? The economy needs the labor pool to start growing again, says Doug Handler, chief U.S. economist at IHS Global Insight. The weak labor market cannot support many more months in which jobs grow by 200,000 or more. "We may not be able to fight the effects of time and age, but we need the share of the population who can work to at least stabilize," he added.

Funk at Express Employment Professionals says the drop in the labor force is masking how high unemployment actually is. "For society, fewer people working means less revenue for the government and higher outlays on social programs," he adds. "It also means there are fewer people paying into Social Security and Medicare, at a time when both programs are already running out of money due to the baby boomer retirement."

  • Kim Peterson

    Kim Peterson is a financial journalist covering business and the economy. She has written for several online and print publications, including MSN Money and The Seattle Times.