Labor Force Participation Rate Decline: Expected, and Bad News!

I’ve had this unscratchable itch after reading CR’s post about the labor force participation rate decline.  I wanted to know how labor force was defined (in the U.S., it’s everyone 16 and up minus students and a bunch of other exceptions), and whether the declining participation was related to the boomers hitting retirement age (or at least, early-retirement age), as opposed to their kids maybe not being so numerous to make up the difference.  At first glance, not so…  I went over to Wikipedia and found the population pyramid from the 2000 census data, which showed that the generational cohort currently entering the workforce is larger in number than the boomers.  Also, only the leading edge of the boomer population is in the 55-64 age group now, where early retirement might make sense for large numbers.

So I went looking for more information.  The BLS has a very nice economist named Mitra Toossi, who publishes reports every couple of years analyzing the labor force.

The most recent report (PDF alert) came out in November 2009.  Not too far back!  It says, on the first page, “the aging of the labor force will dramatically lower the overall labor force participation rate and the growth of the labor force”.  

I can see this.  The population aged 65+ is getting larger compared to the population aged 16+.  And those over 64 are less likely to be labor force participants.  Similarly, the population aged 55-64 is “booming” right now, and they are also less likely to be labor force participants (e.g. kids thru college and house paid off, so a lot of folks have more choices about whether or not to work…)

But then I ask myself, how much of this is “prediction” and how much is rear-view-mirror economythics?

So I open up the same report but from November 2007 (the previous version).  It says “BLS projects that the labor force participation rate will be 65.5% in 2016.”  That’s a no-growth prediction from the rate prevailing in 2007.  The all-time high was 67.1% in 1997 (or 67.3% in 1999-2000 if you look at their data (possibly revised since 2007)… The participation rate dropped to about 65.5% in 2004 after the dot-com recession.

More from the article:  “projected continuation of the decrease in the labor force participation rate of youths…”

“once the baby boomers exit the last years of the prime age group and enter the 55-and-over group, with participation rates roughly half that of the prime age group, the overall labor force participation rate will decline significantly…”

So it seems that some of this “labor force participation decline” was anticipated prior to the recession, and it’s just demographics.  If the marginal benefit from working is reduced (lower pay, less pleasant work environment), some folks who don’t HAVE to work right now, will wait for a better chance later.

On the other hand, given that the decline in participation was forecast years in advance, shouldn’t policymakers have anticipated a deeper recession that normal just from the workforce demographics?  And perhaps more importantly going forward, since we know the boomers are going to be retiring en masse over the next few years (many with their belts fully tightened by the recession) doesn’t this imply a very weak recovery?  If workforce participation is going to be declining even in good times, the number of willing workers will be suppressed, and might even decline outright, even if total population remains stable to slightly increasing.  (It doesn’t help that the 2000s were a weak decade for population growth, with no sign of improvement, either.)  After all, it’s a mathematical identity that GDP is the product of the size of the workforce, the hours per worker, and the productivity per worker…  Size has some headroom due to layoffs, but not as much as it would if population were booming.  Hours are stagnant and honest-work productivity may be plateauing due to computer technology reaching the saturation point…  All of which points to weak growth in the U.S. for a while, which is not bullish for optimistic P/E multiples in the stock market.  Nor for bond default and/or rollover risks, with a lot of bond issuance predicated on perpetual-growth thinking…

Ruh-Roh!  The economy may have had “enough!”

W.S.

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