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Saturday, March 05, 2011

More on Labor Force Participation Rate

by Calculated Risk on 3/05/2011 05:27:00 PM

As I noted yesterday, a key question is what happens to the labor force participation rate as the economy hopefully improves. The current participation rate is 64.2%.

Here are a two earlier analysis pieces:
• From BLS economist Mitra Toossi in November 2006: A new look at long-term labor force projections to 2050
• From Austin State University Professor Robert Szafran in September 2002: Age-adjusted labor force participation rates, 1960–2045

Those papers were written when the participation rate was in the mid-66% range. Based on demographics, Szafran had forecast the participation rate to fall to 64.6% in 2015, and Toosi had forecast the rate to fall to 64.5% in 2020. So some of the recent decline was expected - although it happened sooner and faster than either expected because of the severe recession.

And there might be reasons those forecasts were too high. First the participation rate of the 16 to 19 age group has fallen much faster than Toosi forecast (and might not bounce back much after the recession), and second, some people might have permanently given up.

Sudeep Reddy and Sara Murray at the WSJ wrote: Jobless Rate Falls Further

A growing number of workers with health problems are applying for Social Security Disability Insurance benefits. The disability rolls, where many beneficiaries remain for life, have surged more than 14% since the recession began, to nearly 10.2 million in December 2010.

"We already know from the number of people who have entered the disability rolls that there's going to be a permanent hit to the labor force participation rate," said Lawrence Katz, a Harvard University economist. "That's both costly to them—they're going to be less happy—and costly to us to lose someone who could be a productive worker."
I still expect some bounce back in the participation rate, and how many people return to the labor force is key in estimating how many jobs are needed to reduce the unemployment rate.

As I noted yesterday, if the Civilian noninstitutional population (over 16 years old) grows by about 2 million per year - and the participation rate stays flat - the economy will need to add about 100 thousand jobs per month to keep the unemployment rate steady at 8.9%.

If the population grows faster (say 2.5 million per year), and/or the participation rate rises, it could take significantly more jobs per month to hold the unemployment rate steady. As an example, if the working age population grows 2.5 million per year and the participation rate rises to 65% (from 64.2%) over the next two years, the economy will need to add 200 thousand jobs per month to hold the unemployment rate steady.

One thing is clear - we need more jobs!

Summary for Week ending March 4th