2014 CBO Report on Labor Force—Debunked

* Editor's Note: This post IS NOT about the earlier and much publicized 182-page CBO report about Obamacare. It's a different report, and this post only pertains to what the CBO says about the labor force participation rate in that report. Look for Editor's Notes along the way.

From the CBO's summary: The Slow Recovery of the Labor Market (February 2014)

Of the roughly 3 percentage-point net decline in the labor force participation rate between the end of 2007 and the end of 2013:

• about 1½ percentage points was the result of long-term trends (primarily the aging of the population),
• About 1 percentage point was the result of temporary weakness in employment prospects and wages,
• about ½ of a percentage point was attributable to unusual aspects of the slow recovery that led workers to become discouraged and permanently drop out of the labor force.

Employment at the end of 2013 was about 6 million jobs short of where it would be if the unemployment rate had returned to its prerecession level and if the participation rate had risen to the level it would have attained without the current cyclical weakness. Those factors account roughly equally for the shortfall.

From the CBO's full 20-page Report (PDF):

(Page 14 of the report) Of the 3 percentage-point decline in participation between the end of 2007 and the end of 2013, CBO estimates:

• about 1½ percentage points was the result of long-term trends,
• about 1 percentage point arose from temporary weakness in employment prospects and wages,
• about ½ of a percentage point was attributable to unusual aspects of the slow recovery.

During the past six years, the participation rate has declined by roughly 1½ percentage points because of long-term trends, CBO estimates. That decline is attributable mostly to retirement of members of the baby-boom generation. The aging of that generation has increased the share of people who are age 55 or older and are thus less likely to work than younger people.

Editor's Note: The reasons for the declining participation rate is a highly debated issue, that even different branches of the Federal Reserve can't agree on—but here's one theory:

From 2008 through 2013, the U.S. has had an estimated 15.4 million high school graduates and 6.8 retired and disabled workers during that same period of time --- for a difference of 8.5 million who might have otherwise been in the labor force. In other words, we've had many more "non-starters" than "leavers" in the labor force.

As of 2011, only 27 percent of those graduates were in full-time jobs, according to a Rutgers study. Meanwhile, the U.S. Secretary of Labor Thomas E. Perez issued the following statement about the January 2014 Employment Situation report released today: "January was the 47th consecutive month of private-sector job growth, with 8.5 million new jobs over that period." That's since December of 2009.

Now look at the timeline again, then look at the numbers again. But yet, the CBO says the decline is "attributable mostly to retirement of members of the baby-boom generation."

In addition, underlying trends in the participation rate within groups of people of a given age or by sex have contributed slightly to the decline in the overall participation rate since 2007. For example, those trends suggest declining participation for people under 25 and roughly stable labor force participation rate for women in their prime working years (ages 25 to 54), which had risen rapidly from the 1960s to the 1980s. (CBO expects that, in coming years, the aging of the population will continue to push down the overall participation rate but underlying trends in the participation rate within groups will have little net effect on the overall participation rate.) ¹⁸

18. For further discussion about underlying trends in labor force participation rates by age and by sex, see Congressional Budget Office, CBO’s Labor Force Projections Through 2021 (March 2011) http://www.cbo.gov/publication/22011

(Page 15 of the report) At the depths of the recession, when sharply falling prices for housing and equities caused a precipitous decline in wealth, a significant number of older people appear to have postponed retirement or otherwise stayed in the labor force to preserve or restore their financial well-being.

Editor's Note: Read further down, when this report seems to contradict that last statement.

The unusually protracted weakness in the demand for labor appears to have led some workers to become discouraged and permanently drop out of the labor force, a longer-term factor that CBO estimates accounts for about one-half of a percentage point of the decrease in the participation rate since 2007.

Editor's Note: The CBO just said "some workers" became discouraged. Since the Great Recession we had 23.9 million Americans on EXTENDED unemployment benefits. That is a lot more than just "some". And not all the unemployed qualified for unemployment benefits.

And on page 18 of a new 31-page White House report it says "Over 20 million people received reemployment services over the past year from the Department of Labor’s programs." That is a lot more than just "some".

And by some estimates, the U.S. has about 48 million people who want a full-time job (out of a record 93.2 million people who are currently not in the work force). That is a lot more than just "some".

And even if the CBO had subtracted a few million to compensate for the underbelly of the economy (The underground workforce: drug dealers, "working girls", janitors and housekeepers working under the table, and kids mowing the neighbor's lawn), that's still a lot more than just "some" discouraged workers.

In part, the permanent withdrawal from the labor force among those unemployed workers is evident in a rise in the number of people applying for and receiving benefits from the Social Security Disability Insurance program, which provides benefits to nonelderly adults who have held jobs but who are judged to be unable to perform “substantial” work because of a disability. ²⁰

20. See Congressional Budget Office, Policy Options for the Social Security Disability Insurance Program (July 2012), http://www.cbo.gov/publication/43421

In CBO’s view, the difficulty of finding work during the past several years made it worthwhile for some unemployed people with moderate disabilities to apply for benefits rather than search for employment that would accommodate their disabilities. Indeed, the number of applications to the program averaged 2.8 million per year between 2009 and 2013, up from an annual average of 2.2 million during the previous five years. Once enrolled, very few recipients leave the program to return to the labor force.

Editor's Note: Per the Social Security Administration, the number of disability applications averaged 2.3 million (not 2.8 million) per year between 2009 and 2013 as the CBO claims—and the previous five years averaged 2 million (not 2.2 million). But regardless, for the time being, that's besides the point.

In two articles at the Economic Populist, Disability Claims and Awards Declined and The Last Word on Social Security Disability, you'll see the difference between disability "applications" (claims) and disability "awards"— which are claims that are actually approved.

From 2008 to 2013, there were 4.9 million disability awards; and from the previous five years there were 3.4 million awards—averaging less than 1 million new awards per year. So "in the CBO's view", they are incorrect on this point. And less than 1 million a year going on disability hardly affects a labor force participation rate with a civilian noninstitutional population of 247 million with annual birth-rates near 4 million a year.

Also, according to the Social Security Administration, actual SSDI awards (not claims or applications) declined from 2011 to 2012, and SSDI terminations were up, for a net increase of only 2.94% for people in current payment status for SSDI benefits.

But the CBO is correct on one thing: when they say, "Once enrolled, very few recipients leave the program to return to the labor force." And especially now, with so few jobs to return to.

Other people also have left the labor force and will not return—in CBO’s view, because of the recession and slow recovery—without applying for disability benefits. For example, the weakness in the labor market has led some older workers to retire earlier than they otherwise would have and to remain out of the labor force permanently. 

Editor's Note: This may be considered a partial contradiction. The CBO just said, "has led some older workers to retire earlier" — but they earlier said, "a significant number of older people appear to have postponed retirement or otherwise stayed in the labor force to preserve or restore their financial well-being."

While the first statement may be partly true, most Baby Boomers aren't old enough to retire early before 62 (unless they are wealthy). As it's been pointed out earlier, the very first Baby Boomer (who born in 1946) didn't become eligible to retire until 2008 when she turned 62—but the labor force has been in decline since 2000.

And NO, it's not because older workers are shuffling off into retirement, it's because employers aren't hiring them (especially if they are long-term unemployed).

In addition, some unemployed workers who were unable to find suitable new jobs chose alternative unpaid activities, such as caring for family members, and will remain out of the labor force permanently.

Editor's Note: Right. Or maybe a few million are lounging by pool or laying on the beach—with no income at all for frozen strawberry Margaritas.

(Page 16 of the report) The effect of long-term factors on the participation rate that has stemmed from the recession and its aftermath—inducing people to leave the labor force permanently—is expected to diminish slowly. Over time, those who have left for that reason will reach retirement age or otherwise come to a point at which they would have left the labor force regardless of the strength of the labor market. As the effects of the recession and its aftermath wane, future changes in labor force participation will be determined by long-run trends in demographics.

Editor's Note: And maybe the trend might be determined by some better job creation, because today in 2014, there aren't enough jobs. But the good news is, if people keep dropping people out of the workforce, the unemployment rate will hit 0% before long.

In conclusion: The link to the CBO report was found from this article, Employment’s Decline, for Men of All Ages (February 7, 2014) by Binyamin Appelbaum at the New York Times, where the author says:

"There is a growing body of research suggesting that the sharp drop in the share of Americans with jobs is largely a result of demographic changes, like an aging work force."

The link that the author provided was to another post he wrote: The Employment Rate’s New Normal (January 10, 2014) which says nothing about "an aging work force" — but it does have a link to another article at the New York Times: Growth in Jobs Slows Sharply to 3-Year Low (January 10, 2014) where it says:

While some of that decline is because of demographic factors like an aging population and rising retirements, Ms. [Julia Coronado, chief United States economist at BNP Paribas] said she was particularly troubled by how many prime-age workers were dropping out. Among workers aged 45 to 54, the participation rate dropped 0.4 percentage point to 79.2 percent, the lowest since 1988. For workers 55 and older, the participation rate edged down only 0.1 percentage point. “It just keeps dropping and dropping,” she said. “It’s depressing, as it’s not just older workers retiring.”

The Last Editor's Note: I've taken Binyamin Appelbaum to task several times, like here, here, here and here. So once again (and with this post) a high school drop-out debunks all the "experts". Hooray for the underdogs!!!!