Sunday, April 03, 2011

Labor Force Participation Rate Update

by Calculated Risk on 4/03/2011 06:10:00 PM

Tracking the participation rate for various age groups monthly is a little like watching grass grow, but the trends are important.

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 8.8%.

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.

That is why forecasting the participation rate is important - and why reports of the number of jobs needed to hold the unemployment rate steady are all over the place (and can be very confusing - and I'm guilty of using different numbers).

Employment Pop Ratio, participation and unemployment rates Click on graph for larger image in graph gallery.

Here is a repeat of the graph showing the participation rate, unemployment rate, and employment-to-population ratio.

The Labor Force Participation Rate was unchanged at 64.2% in March (blue line). This is the lowest level since the early '80s. This is the percentage of the working age population in the labor force.

Here is a look at some the long term trends (updating graphs through March 2011):

Labor Force Participation rates Men and WomenThis 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).

The participation rate for women increased significantly from the mid 30s to the mid 70s and has mostly flattened out. The participation rate for men has decreased from the high 90s to 88.7% in March 2011. (down slightly from February)

There will probably 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.

Labor Force Participation Rates, Selected Age GroupsThis graph shows that participation rates for several key age groups.

There are a few key long term trends:
• The participation rate for the '16 to 19' age group has been falling for some time (red). This increased in March to 34.1% from the record low 33.5% in February.

• 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).

• The participation rate for the '20 to 24' age group fell recently too (perhaps more education before joining the labor force). This appears to have stabilized, and 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. The '65 to 69' age group hit a new record high in March!

The increase in participation of older cohorts might push up the overall participation rate over the next few years, however eventually the 'over 55' participation rate will start to decline as the oldest baby boomers move into even older age groups.

I've been expecting some small bounce back in the participation rate, but I don't think the bounce back will be huge - and that means it will take fewer jobs than some expect to lower the unemployment rate. This will be a key number to watch over the next few years.