Monday, May 07, 2012

The Declining Participation Rate

by Bill McBride on 5/07/2012 07:30:00 PM

There has been some discussion about the causes of the decline in the participation rate. Here is a post from Catherine Rampell today at the NY Times economix today: Baby Boomers and the Shrinking Work Force

[A]s America ages, its overall labor force participation rate will fall because older people are less likely to work. But even excluding older Americans, labor force participation rates have still fallen sharply over the last few decades, and especially in the last five years.
This is an excuse to update some graphs to look at the long term trends. (update: see Brad Plumer's The incredible shrinking labor force )

The following graph shows the changes in the participation rates for men and women since 1960 (in the 25 to 54 age group - the prime working years).

Labor Force Participation rates Men and WomenClick on graph for larger image in graph gallery.

The participation rate for women increased significantly from the mid 30s to the mid 70s and has mostly flattened out this year - the rate increased slightly in April to 74.3%. The participation rate for men has decreased from the high 90s a few decades ago, to 88.7% in April.

There might be some "bounce back" for both men and women (some of the recent decline is probably cyclical), but the long term trend for men is down.

Rampell writes:
You may notice that the labor force participation rate had been climbing from the 1940s through about 1990. That rise reflects the fact that more women entered the labor force as gender roles evolved. Women’s labor force participation rate continued rising through the late 1990s, dropped a couple of percentage points, and then more or less flat-lined.

The main reason the labor force has been declining in the last couple of decades, then, is that men have been dropping out in droves.
There are other key trends. The next graph shows that participation rates for several key age groups.

Labor Force Participation Rates, Selected Age Groups• The participation rate for the '16 to 19' age group has been falling for some time (red). This was at 33.8% in April.

• The participation rate for the 'over 55' age group has been rising since the mid '90s (purple), although this has stalled out a little recently (perhaps cyclical). This was at 40.3% in April.

• The participation rate for the '20 to 24' age group fell recently too (perhaps more people are focusing on eduction before joining the labor force). This appears to have stabilized - although it was down to 70.6% in April. I expect the participation rate to increase for this cohort as the job market improves.

Labor Force Participation rates over 55 age groupsThe third graph shows the participation rate for several over 55 age groups. The red line is the '55 and over' total seasonally adjusted. All of the other age groups are Not Seasonally Adjusted (NSA).

The participation rate is generally trending up for all older age groups.

Eventually the 'over 55' participation rate will start to decline as the oldest baby boomers move into even older age groups.

These trends feed into the overall participation rate. A few weeks ago I posted: Labor Force Participation Rate Projection Update

Here is a repeat of a couple of graphs based on BLS economist Mitra Toossi's projections.

Participation RateNote that Toossi is expecting a couple of recent trends to continue: lower participation rates for people in the 16 to 24 year age group (I think this decline is mostly due to more people attending college), and an increase in the participation for older age groups (I think this increase is due to several factors including less physically strenuous jobs, and, unfortunately, financial need).

An increase in the participation rate for an age group (like the 60 to 64 group) is just on part of the equation. We also have to recognize that a large cohort is moving from the 55 to 59 age category into the 60 to 64 age group, and the participation rate for that cohort is falling. (this post had a great graph on the age of the population).

Participation RateThe last graph shows the actual annual participation rate and two forecasts based on changes in demographics. Now that the leading edge of the baby boom generation is starting to retire, the participation rate is declining and will probably continue to decline for the next 20 years. Note: the yellow line is from a forecast by Austin State University Professor Robert Szafran in September 2002.

This suggests that any bounceback in the participation rate as the economy recovers will probably be fairly small, and that the decline in the overall participation rate is mostly due to demographic factors.

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