Sunday, December 07, 2014

Decline in the Labor Force Participation Rate: Mostly Demographics and Long Term Trends

by Bill McBride on 12/07/2014 12:48:00 PM

For several years, I've been arguing that "most of the recent decline in the participation rate" was due to demographics and other long term structural trends (like more education).  Clearly this was an important issue because if most of the decline had been due to cyclical weakness, then we'd expect a significant increase in participation as the economy improved. If the decline was due to demographics and other long term trends, then the participation rate might keep falling (or flatten out for a period before declining again) as the economy improves.

Definitions from the BLS:

Labor force participation rate: The labor force as a percent of the civilian noninstitutional population.
Labor Force: The labor force includes all persons classified as employed or unemployed in accordance with the definitions contained in this glossary.
Civilian noninstitutional population: Included are persons 16 years of age and older residing in the 50 States and the District of Columbia who are not inmates of institutions (for example, penal and mental facilities, homes for the aged), and who are not on active duty in the Armed Forces.
Basically the labor force participation rate is the percent of people, 16 years and older, in the labor force (employed or unemployed).

Most of the recent research supports my view. As an example, from Federal Reserve researchers Stephanie Aaronson, Tomaz Cajner, Bruce Fallick, Felix Galbis-Reig, Christopher L. Smith, and William Wascher: Labor Force Participation: Recent Developments and Future Prospects
The evidence we present in this paper suggests that much of the steep decline in the labor force participation rate since 2007 owes to ongoing structural influences that are pushing down the participation rate rather than a pronounced cyclical weakness related to potential jobseekers’ discouragement about the weak state of the labor market ...
In June, Dean Baker wrote: The Question on People Leaving the Labor Force is 41-Year-Olds, Not 61-Year-Olds
[T]he story of people leaving the labor force is not primarily one of older workers who are near retirement age, it is primarily a story of prime age workers. ...

It is difficult to envision any obvious reason why people in their prime working years would suddenly decide that they did not want to work other than the weakness of the labor market. Most of these workers will presumably come back into the labor market if they see opportunities for employment.
This brings up a few key points:

1) Analyzing and forecasting the labor force participation requires looking at a number of factors. Everyone is aware that there is a large cohort has moved into the 50 to 70 age group, and that that has pushing down the overall participation rate. Another large cohort has been moving into the 16 to 24 year old age group - and many in this cohort are staying in school (a long term trend that has accelerated recently) - and that is another key factor in the decline in the overall participation rate.

2) But there are other long term trends. One of these trends is for a decline in the participation rate for prime working age men (25 to 54 years old).

3) Although Dr. Baker argues that the decline in prime working age workers is due to "weakness of the labor market", this decline was happening long before the Great Recession. For some reasons, see: Possible Reasons for the Decline in Prime-Working Age Men Labor Force Participation and on demographics from researchers at the Atlanta Fed: "Reasons for the Decline in Prime-Age Labor Force Participation"

Lets take a look at Dean Bakers "41-Year-Olds". I used the BLS data on 40 to 44 year old men (only available Not Seasonally Adjusted since 1976). I choose men only to simplify.

Labor Force Participation Rate, Men, 40 to 44 Click on graph for larger image.

This graph shows the 40 to 44 year old men participation rate since 1976 (note the scale doesn't start at zero to better show the change).

There is a clear downward trend, and a researcher looking at this trend in the year 2000 might have predicted the 40 to 44 year old men participation rate would about the level as today (see trend line).

Clearly there are other factors than "economic weakness" causing this downward trend.   I listed some reasons a few months ago, and research from Pew Research suggests stay-at-home dads is one of the reasons: Growing Number of Dads Home with the Kids

Just looking at this graph, I don't think there are many "missing 41-Year-Old" men that will be returning to the labor force.

Labor Force Participation Rate, Men, Prime Age GroupsThe second graph shows the trends for each prime working age men 5-year age group.

Note: This is a rolling 12 month average to remove noise (data is NSA), and the scale doesn't start at zero to show the change.

Clearly there is a downward trend for all 5 year age groups. When arguing about how many workers are "missing", we need to take these long term trends into account.

Labor Force Participation Rate, Men, Prime Age GroupsThe third graph shows the same data but with the full scale (0% to 100%).  The trend is still apparent, but the decline has been gradual.

The bottom line is that the participation rate was declining for prime working age workers before the recession, there are several reasons for this decline (not just recent "economic weakness") and many estimates of "missing workers" are probably way too high.

And here is a look at the participation rate of women in the prime working age groups over time.

Labor Force Participation Rate, Women, Prime Age GroupsClick on graph for larger image.

This graph shows the trends for each prime working age women 5-year age group.

Note: This is a rolling 12 month average to remove noise (data is NSA), and the scale doesn't start at zero to show the change.

For women, the participation rate increased significantly until the late 90s, and then started declining slowly.  This is a more complicated story than for men, and that is why I used prime working age men only in the previous graphs to show the gradual downward decline in participation that has been happening for decades (and is not just recent economic weakness).

Labor Force Participation Rate, Women, Prime Age GroupsThis graph shows the same data for women but with the full scale (0% to 100%).  The upward participation until the late 80s is very clear, and the decline since then has been gradual.

To repeat: The bottom line is that the participation rate was declining for prime working age workers before the recession, there are several reasons for this decline (not just recent "economic weakness") and many estimates of "missing workers" are probably way too high.