Monday, June 08, 2015

Labor Force Participation Rate: There are few "Missing 41-Year-Olds"

by Bill McBride on 6/08/2015 12:08:00 PM

Every month, with the release of the employment report, we see commentary that says "the labor force participation rate is at or near a 30 year low". Duh! That was expected based on demographics and is not worth reading (Note: the participation rate might move sideways for a couple of years, but is projected to decline for another decade or more).

There is usually some discussion about the decline in the prime working age participation rate - and this is more interesting. However a careful analysis shows that the participation rate for prime workers is now close to the expected rate.

A year ago I wrote: 41-Year-Olds and the Labor Force Participation Rate and I discussed 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) There has been some discussion that the decline in prime working age workers is due to "weakness of the labor market", however 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"

Here is a look at the trend for 40 to 44 year old men (BLS data, 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 new 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 trend is more complicated for women.

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 GroupsThis 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 above 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.

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.