Monday, February 13, 2017

Gary Cohn and the Participation Rate

by Bill McBride on 2/13/2017 12:05:00 PM

A Bloomberg article from December had some comments from Gary Cohn, the White House National Economic Council Director: Cohn in His Own Words

The published U.S. unemployment rate “is a very, very fictitious rate. It’s only that low because the participation rate has gone downward...”

“The participation rate really measures people out in the U.S. population that are looking for jobs. There are so many people who are frustrated looking for jobs that they’ve just stopped. If the participation rate normalized -- this is a fun fact -- if it normalized to Day 1 of the Obama administration, we’d still be at an 11 percent plus unemployment rate.” -- July 2015
This is not a "fun fact", it is complete nonsense.

First, Cohn obviously ignored his own economic research at Goldman Sachs. In March 2016, Goldman Sachs economist David Mericle wrote:  "At this point, we see the cyclical “participation gap” as nearly closed."  If most of the cyclical gap is closed, then the remaining decline was due to demographics and long term trends.

Second, as I've been discussing for years, the reason the recent decline in the overall participation rate (for those 16+ years old) is mostly due to demographics and long term trends.  The two main drivers of the lower participation rate have been aging baby boomers, and younger people staying in school.  There are also other long term trends that have pushed down the participation rate.

Lets look at the participation rate trend for two young male cohorts, those 16 to 19 years old, and those 20 to 24 years old.

Participation Rate, Men, 16 to 24Click on graph for larger image.

Note: For simplification, I used men only for this graph.  It is more complicated for women because there was a significant increase in women participating in the labor force in the '60s, '70s, and '80s due to changing societal norms.

There has been a down trend that for both the "16 to 19" and "20 to 24" year old male cohorts that preexisted the recent recession.  This is because more people are staying in school (a long term positive for the economy).  This pushed down the overall participation rate - especially since there were large cohorts recently in these age groups.

Another key trend has been the aging of the baby boomers.  This is a little more complicated because we have to look at two factors - the participation rate for older workers, and the number of people in each cohort.

The following table tracks two cohorts over the last decade.  Those people in the 50 to 54 year old cohort in January 2007, are now in the 60 to 64 year old cohort.

And those people in the 55 to 59 year old cohort in 2007, are now in the 65 to 69 year old cohort.

If we track these people over time, we see the large cohort in the 50 to 54 in January 2007 has seen their participation rate decline from 80.5% to 55.6%.

And the cohort in the 55 to 59 age group in 2007 has seen their participation rate decline from 71.9% to 31.8%.  These people are retiring (being able to retire is a positive for an individual).

Demographics and Participation, Selected Cohorts
Population50 to 5455 to 5960 to 6465 to 69
Jan-0720,66718,194   
Jan-17    19,78616,607
Participation Rate50 to 5455 to 5960 to 6465 to 69
Jan-0780.5%71.9%
Jan-1755.6%31.8%

These are large population cohorts, and the decline in their participation has pushed down the overall participation rate.

A careful analysis suggests that almost all of the decline in the overall participation rate over the last decade is related to demographics and long term trends.

Perhaps Mr. Cohn doesn't know how to normalize using demographics, but his assertions are nonsense.