Wednesday, December 7, 2011

Are We Making Too Much of the Drop in Labor Force Participation Rate? Is It Mostly Due to Boomers Hitting the Links? Evidence Says No

A good analysis from Tim Duy's Fed Watch on the issues with the labor force participation rate, that many (hands raised) have cited as a significant reason the unemployment rate has been so "good" the past few years (i.e. not as bad as it could have been).  With a more normal labor force participation rate, the unemployment rate would be ~2 to 3% higher.  We'll skip all the other reasons the unemployment rate is under counting the unemployed - we went through that ad nauseum in 2008-2010.   [Apr 2, 2008: The Underemployment Rate is Rising]

His analysis starts with a Bloomberg article which takes the easy way out and says its the boomers retiring that is creating the structural shift.

  • At play is a decline in the share of the working-age population, known as the participation rate, meaning that the economy needs to create fewer jobs to bring down unemployment. While some of the decrease has been caused by discouraged workers dropping out of the labor force, another driver is that the baby-boom generation is starting to move into retirement, according to economist Dean Maki.
  • “Demographic forces are the single biggest factor pushing the participation rate down,” said Maki, chief U.S. economist at Barclays Capital Inc. in New York and a former economist at the Federal Reserve. “This is a bit of a slow-moving drama but it’s likely to become more important in coming years.”

Is it Mr. Maki??

A deeper look beneath the surface says something perhaps more ominous - most of the degradation is happening in the 16-24 and 25-54 age ranges.  Clearly some of this (in the former group) is young adults staying in college (longer), and perhaps more of the population going to college (I don't have the data) but it surely doesn't explain the cliff drop.  My thought is older workers now are doing the work that once was left for the young - a "crowding out" if you will.  [May 9, 2009: The Curse of the Class of 2009 - Lower Wages for Up to a Decade]

[click to enlarge]

As for the 25-54s - we've simply lost a lot of those jobs "away" to technological effeciences [Mar 28, 2011: Productivity - Wo(man) vs Machine] , outsourcing, and lack of bubbles (i.e. construction boom, realtors & mortgage processors needed at far lower levels).  I recall a story I read (perhaps posted) in 07-08 time frame where 1 in 7 people in California had a real estate license... not quite so needed nowadays.  This one is probably the most disconcerting simply because its the middle of the bell curve for working Americans - even a 1% drop can have dramatic effects.

As for those more mature folk?  Indeed the 65+ crowd is working MORE, not LESS (more are in the job market) as the twin stock bubbles, housing bubble, and war on savers the past 3-4 years has wrecked retirement plans for many.  [Dec 15, 2010: USA Today - American Workforce Graying as the Young Increasingly Locked Out]

Can't blame the drop in labor force participation rate on near retirees either.   [Sep 1, 2008: AP - Laboring Longer is Growing Trend for Americans]

Good stuff !!  Read the entire post here.

[Feb 7, 2011: BW - The Youth Unemployment Bomb] [Oct 4, 2010: WSJ - Americans Souring on Free Trade as Losing Their Jobs Overpowers Lower Prices]

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