People Are Leaving the Workforce in Droves: What it Means for Businesses

If current employment trends continue, the number of people out of the labor force will surpass the number of working Americans in about four years.

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By Ray Hennessey

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What will happen to your business when more of your customers don't work than do?

Given the sheer size of our country, it seems a question that we never need ponder. But the trends in employment numbers, as reflected in this morning's Labor Department report, show that the scenario may be closer than we realize.

While the economy added more jobs than expected, more people dropped out of the workforce altogether. According to the latest report, 720,000 people were no longer included among the working. All told, there are 91.5 million people of working age who are not working.

That helped cause an unusually sharp drop in the labor-force participation rate to just 62.8 percent from 63.2 percent a month earlier. That is the lowest rate since 1978. While some are blaming that drop on the government shutdown, when federal workers were furloughed, the Bureau of Labor Statistics itself is not. While there may be some difficulty in classifying those furloughed workers as employed or unemployed, since most were still receiving pay or at least on a temporary layoff, all are included in the workforce numbers, so the shutdown had no effect on participation itself.

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No, sadly, more people are simply leaving the workforce. Here is the scariest part: As Zero Hedge notes, at this rate, the number of people out of the labor force will surpass the number of working Americans in about four years.

Ponder that a moment. There will be more people not earning a regular income from their labor than there are people collecting a real paycheck. In the simplest terms, more takers than makers. Even if that rate slows, the overall trends are terrible. Participation has been collapsing since 2008.

There are business and policy considerations that come from having a country where more people don't work than do. First, think of government policies. No matter where one stands on the debate over safety-net programs like welfare and food stamps, or massive federal undertakings like Obamacare, everyone agrees that those need taxation to fund them. Taxes come from businesses and individuals. Both groups, though, when takers outnumber makers, will have less in income off which to be taxed.

You might argue that a healthy junk of the non-working population will have non-government income, in the form of drawdowns from investments squirreled away for retirement. True, but this will trigger a negative market effect. Using retirement savings requires selling securities. The more people selling against fewer people buying since fewer are employed, means a drop in asset prices. Markets have been fueled by the steady stream of 401(k) and pension purchases over the past few decades. That will trickle as more people sell than buy.

Related: The Cold, Hard Facts About Small Business Hiring (Infographic)

Then there is the practical business impact. It is not that the takers have no money to spend. They do, either by government-entitlement check, retirement drawdown or savings reduction. But they are on a fixed or more limited income than someone who works for a living. Businesses want people who make money – and are in a position to make even more. A country where more people are on a fixed income than an elastic one is quite simply bad for business.

Is it all doom and gloom? Certainly not. As with all challenges there are, of course, opportunities. Technological advances have a way of reversing, or at least dramatically altering, economic trends. The boom years for employment and balanced federal budgets in the 1990s had everything to do with the emergence of the Internet rather than with any enlightened economic policies. New emerging technologies can easily create new companies and, therefore, new jobs, attracting people who have dropped out back into the workforce – but entrepreneurs know that already.

Still, there is more reason for pessimism than optimism in the numbers, particularly since they reflect a lack of labor ethic that is not usually associated with being American. The country, it seems, has some work to do, and that starts with Americans getting back to work.

Related: How the Right School Can Help You Thrive in a Lousy Job Market (Infographic)

Ray Hennessey

Former Editorial Director at Entrepreneur Media

Ray Hennessey is the former editorial director of Entrepreneur.

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