There are millions of people missing from the labor force who have mysteriously disappeared. They are 3% of the 140 million work force or about 4,000,000 people. The Labor Force Participation Rate suddenly dropped by 3% from the low 60’s to the high 50’s during the great crash of 2009. This vacancy was the main reason that the unemployment rate has improved since the crash. The missing 3% of the workforce who were moderate income earners suddenly allegedly decided to retire during a scary crash in 2007-09 that had greatly reduced their retirement nest egg. This would be a very irrational move to make if one was a non-entrepreneurial working class moderate income person. One theory is that they really were capable of taking early retirement and were too scared to quit and then recession and layoffs forced them into unemployment and early retirement. Another theory is that this is a fake retirement that was based on a delusion of excessive harvesting of unsustainable or bogus yields from retirement portfolios and failure to account for and budget for personal deferred maintenance costs such as home repair, automobile replacement, major dental work, home appliances, etc. Thus a naïve retiree may have miscalculated both his portfolio yield and his living expense. Once the current stock bubble bursts and several years of deferred maintenance have been accumulated and reached the breakpoint where money must be spent on these projects then the retiree may be forced back into the job market.
Regarding "unsustainable or bogus yields" what I mean by this is that some portion of yield from junk bonds, etc. should not be viewed as yield but is really compensation for future crashes and must be saved to rebuild the damage from a junk bond default. Also many mutual funds throw off a distribution that includes amortization of principal from debt repayment and naïve investors eagerly lap up and spend this “distribution yield” not realizing it is a return of principal, which can inflate yield by one or two percent. Additionally closed end funds may use leverage to boost yield but that can backfire in a crash causing a more serious loss of principal during a crash.
Even before the 2009 crash there were reports of stagnant real wages since 1998 for the bottom 80% of the population. Thus these people may have been unable to adequately save for early retirement. If undercapitalized just before the crash and then they experienced shocking losses then they would not want to retire in 2009. The job losses were concentrated among the moderate to unskilled workers. These are the ones who have had the hardest time recovering from high unemployment and also had the hardest time saving for retirement. They tended to trust real estate and savings accounts for investments rather than stocks. If their real estate did poorly and savings account yields become very low then why did they suddenly decide to take early retirement?
I read an article about homeless people in San Jose and was shocked at how people could live off of almost nothing living in a homeless tent camp and using discarded salvaged goods. Perhaps there is no limit on the ability of some people to live on a reduced living standard.
It is very strange why during a hard crash of 2009 so many people would voluntarily chose to “retire” or why there has been a huge increase in people going on Social Security disability in recent years.
The situation with persistent hidden unemployment is the explanation for why bond yields remain low despite record stock prices and a reduction of the official unemployment rate. Even if these people are unable to come into the workforce and thus employers suffer from wage inflation the economy will still suffer a deflationary influence from the lack of purchasing power caused by unemployment. It is unlikely employers will cave in to workers and give huge pay raises. More likely they will ship jobs overseas to southern Europe and Japan where highly skilled workers are desperate for work.
Since the bond market is more reliable and efficient than stocks than I respect the wisdom of bonds trying to tell the world that something is wrong with the economy and start out from that point trying to reconstruct what hidden deflationary forces are active. I challenge anyone to explain why moderate income workers with scanty savings during a scary 2009 crash would suddenly decide to splurge on early retirement! Or they suddenly “discovered” they were eligible for disability and decided to apply. I don't expect a deflation, I merely expect that growth will be very very low and thus stocks prices will need to drop 40%.
Investors need to be aware of hidden economic trends and how they can influence stock prices. I wrote an article “Deflationary nature of global debt burden.”