My column on the most recent employment report elicited considerable commentary from readers and sparked a discussion in Columnist Conversation regarding a decline in the labor force participation rate, or LFPR. They posited that the data were indicative of a poor labor market, and I argued that part of the drop in the LFPR was attributable to demographic shifts. The Chicago Fed recently published research that supports my view, indicating that the LFPR has fallen 3.3 percentage points to 64% in December 2011 since peaking at 67.3% in early 2000. But just under half of this drop is due to demographic factors; the remaining component might be attributable to a weak jobs market, or other factors.
There are a few forces at work regarding who is not working or looking for work. One of the biggest is the retirement of baby boomers. The first baby boomers turned 50 in 1996, and this age group tends to see a lower LFPR than younger age groups. Remember that the LFPR includes those 16 and over, and there is no "cap" on that rate. As people enter retirement, they are still counted in the population (the denominator of the LFPR), even though we would hardly expect them to continue working once they reach 80.
Excluding those over age 80 (a group that has been growing as a percentage of the population), the drop in the LFPR was 2.7 percentage points since 2000, rather than the 3.3 percentage point overall drop cited above. Retiring workers accounted for 0.8 percentage points of this drop. While more in this age group may be working compared with how many in this age group worked in the past, the simple fact is that fewer people in this age group are working compared with younger age groups. As this group grows, the total LFPR will fall, even if some people delay retirement.
Another factor relates to those at the opposite end of the spectrum: teen workers. In past decades, teens often joined the labor force. (I started working a few days after turning 16 and I've been in the workforce ever since.) But recently, that group is not seeking work the same way it has in the past. In fact, the LFPR for those aged 16 to 19 fell to just 38.4% in 2011 from 51.9% in 2000. It's a trend that started before the recession, so it's probably not related as much to job prospects as it is to some other cause. The lower LFPR of teens accounted for about 0.4 percentage points of the drop in total LFPR.
By adding the 0.8-percentage-point drop in LFPR of an aging population to the 0.4-percentage-point drop attributed to fewer teens in the labor force, it explains 1.2 percentage points of the 2.7-percentage-point drop in LFPR for those aged 16 to 79. The remaining decline is likely because of the poor labor market, but only in part.
Analyzing data from the U.S. Bureau of Labor Statistics, I found that those who were not in the labor force in 2002 but wanted a job immediately totaled 4.8 million out of 72.6 million not in the labor force. The adult population at the time was 216.5 million. In January 2012, those who were not in the labor force but wanted a job immediately totaled 6.3 million, with 87.9 million not in the labor force out of a total adult population of 242.3 million.
The percentage of the adult population not in the labor force but wanting a job immediately increased to 2.6% from 2.2%, an increase of 0.4 percentage points in 10 years. Since December 2007, just before the recession, those not in the labor force who wanted a job increased to 2.6% from 2%%, an increase of 0.6 percentage points. Those not the labor force who did not want a job, including those who retired, increased by 20% compared with population growth of 12% over the same 10 years.
Thus, the job market played an apparent role in the increased number of people who were not in the labor force, along with other factors, one of which was demographics. That still doesn't explain the whole story.
In the key category of males aged 25 to 54, Chicago Fed researchers found a trend going back to 1987 in which the LFPR fell to 89% from nearly 96% in 1987, with most of the decline occurring in the 20 years preceding the recession. This decline was concentrated almost exclusively in males with only a high school education and no college. Female high school graduates and college graduates of both sexes saw consistent LFPR over 25 years.
The LFPR is declining, clearly, but recent economic factors only partly explain why. The demographics of an aging population and fewer teen workers explain nearly half of the drop in the past 10 years; however, given the long-term decline going back 25 years in that one key subsector, 25- to 54-year-old men with only a high school education, something else must be going on.
But that is a question for a sociologist, not an economist.
