* Editor's Note: You can consider this PART II to a previous post. It's about the Labor Force Participation Rate (AGAIN!!!!) Read that post (or not) then read this post (or not) or skip directly to the data (or not).
The reasons for the declining participation rate is a highly debated issue among economists, a debate that even different branches of the Federal Reserve can't seem to agree on. The three most given reasons are:
- it's mostly because of discouraged workers who dropped out of the labor force because they couldn't find a job, and that they are mostly in the "prime-age" group of workers who either weren't expected to still be in school and were too young to retire, or
- it's mostly because a lot of people couldn't find a job and went back to school, or
- it's mostly because a whole bunch of Baby Boomers retired.
Some say it's all of the above. I'm here to say (for a fact) that it's not mostly because a few million middle-aged people decided to drop out of the labor force to sit at a bar or lounge by the pool. They did NOT retire. I am 58 years old and have been unemployed since being laid off in 2008. I did not retire, and I know many more in the same boat I am in. We have been in touch for years, and have been monitoring the situation very closely. None of us are retired...we are desperate. Now allow me to make my case.
From an IMF blog about Okun's Law: Are Jobs and Growth Still Linked? (February 7, 2014):
"In the United States, where unemployment rates have fallen over the past year, there is concern that increasing numbers of people are dropping out of the labor force, thus decoupling jobs and growth...consistent with a view1 that people dropping out of the labor force could be accounting for some of the sharp drop in U.S. unemployment."
1. Abstract: "In this paper, we provide compelling evidence that cyclical factors account for the bulk of the post-2007 decline in the U.S. labor force participation rate. (Editor's Note: Economists describe cyclical unemployment as the result of businesses not having enough demand for labor to employ all those who are looking for work.)
The IMF post links to a Washington Post article from September 2013 by Brad Plumer (Keep this in mind: The very first Baby Boomer retired early at age 62 in 2008) :
"Why is the labor force dropping? One big reason the participation rate dropped involves long-run demographic trends that have nothing to do with the current economy. Baby boomers are starting to retire en masse, which means that there are fewer eligible American workers.
Since 2000, the labor force rate has been steadily declining as the baby-boom generation has been retiring. Because of this, the Federal Reserve Bank of Chicago expects the labor force participation rate to be lower in 2020 than it is today, regardless of how well the economy does.
That WaPo article links to a Chicago Fed report (March 2012) to make Plumer's case, which says:
"Just under half of the post-1999 decline in the U.S. labor force participation rate [LFPR] can be explained by long-running demographic patterns, such as the retirement of baby boomers. These patterns are expected to continue, offsetting LFPR improvements due to economic recovery.
Then in his September 2013 article at the WaPo he continues:
"Americans over the age of 65 are much less likely to work than prime-age Americans. And since that subset of Americans is swelling, that drives the labor-force participation rate down. Note that this is happening even though older Americans are staying on the job for longer than they did during the 1990s.
Economists disagree, however, on exactly how much demographics are responsible for the fall in the participation rate. The Chicago Fed estimates that retirements accounted for only one-fourth of the drop in labor force participation since the recession began. Other analysts, including Barclays, have suggested2 that aging Boomers could account for a majority of the fall."
2. Here Plumer links to his May 2012 WaPo article with a chart indicating that since the recession hit, large numbers of Baby Boomers began to retire. But half-way through that article it says of the declining labor force:
"The trend predates President Obama. And while part of the story is clearly that the labor force is shrinking because the bad economy is driving workers out, another significant factor is that baby boomers are beginning to retire early — a trend that has worrying implications for future growth.
In a March 2012 report titled “Dispelling an Urban Legend,” Dean Maki, an economist at Barclays Capital, found that demographics accounted for a majority of the drop in the participation rate since 2002.3
3. From the website of Arizona State University - W.P. Carey School of Business:
The labor force participation rate has been on a steady decline since 2000 because of the large numbers of Baby Boomers who are leaving the work force via retirement.
“Simple demographics at work have caused the downward trend in the participation rate over the last decade,” Maki noted. “We believe this impact [retiring Baby Boomers retiring] accounts for about two-thirds of the actual drop in the participation while the other one-third is cyclical.”
Detractors, he explained, claim the unemployment report shouldn’t count because it is driven by people dropping out of the labor force—and that these people will come back into the labor force at some point, preventing the rate from falling much further. To Maki, this is an urban legend. “Everyone seems to believe this, but it has never actually happened. My challenge to people with that view is to show me an example in the past of when that has occurred,” he said, noting that job losers, not re-entrants, drive the unemployment rate.
Maki shared additional data to support his claim that the structural impact of Baby Boomer retirement has driven much of the change in unemployment rate patterns...The largest category of unemployed people who say they do not want a job are the in the 55+ age group—this category increased by 1.7 percent from Q4 2007 to Q3 2013.
“The fraction of the population that is 55+, not in the labor force, and don’t want a job—i.e., retired people—has been skyrocketing over the last several years,” Maki explained. “So to us the answer is very clear: what is driving the participation rate down is not people getting discouraged and dropping out of the labor force. It is mainly Baby Boomers retiring the way they were supposed to all along.”*
* There is a major flaw with Dean Maki's "theory" --- When he wrote this report two years ago, as a "middle-Boomer" born in 1955, I was 56 years old then. The first Boomer retired early at 62 in 2008; and the first Boomer to retired in 2011 at age 65, the year before Maki made this claim in 2012. (See the total numbers here) Not too many people "retire" at 55 — at least not enough to affect the LFPR. Most of us "regular folks" need to wait to until at least 62 for early Social Security or pensions—and 401ks and IRAs come with early penalties (not that most people have enough cash here either). I suggest that most of these "50-ish" people were laid off and never rehired again (old and unemployed aren't appreciated very much by the "job creators") — and all these middle-aged people are stuck between a rock and a very hard place after exhausting all jobless benefits, reeled in their 401ks, emptied their savings and cashed out all their loose change. They are NOT "retired", they are desperate.
Then further on in the Brad Plumer's September 2013 article at the WaPo, he slightly deflects part of the reason away from the Baby Boomers for being the cause of the declining labor force:
And here's another clue that this isn't just a demographic story: The participation rate for workers between ages 16 and 54 fell sharply during the recession and still hasn't recovered. Obviously retirements can't explain this. So what's going on?
One theory is that the weak job market is causing people to simply give up looking for work. A recent paper from the Boston Fed suggested that these "non-inevitable dropouts" might even account for the bulk of the decline.
Other analyses have put a different twist on that story. According to a recent paper from the Urban Institute, the rate of labor force exit is actually lower than it was in the aftermath of the 2001 recession. That is, labor force drop-outs aren't the big story here. Instead, the report notes, what's happening is that workers aren't entering the labor force at the same rates they used to.
Editor's Note: As I have always stipulated: There are more "non-starters" than their are people leaving the work force—whether they are quitting, retiring, going on disability, leaving the country or dying.
Then Plumer finally gets to the root of the REAL problem near the end of his post:
"Another recent paper noted that the decline in U.S. manufacturing jobs may be partly responsible for the fall in the participation rate."
DA! What have we been shouting about all these Years? Here is the Boston Fed's 51-page report (April 2013) that Plumer graciously (albeit, belatedly) referred to:
Then the Boston Fed report asks:
"In this paper, we provide compelling evidence that cyclical factors account for the
bulk of the post-2007 decline in the U.S. labor force participation rate...Since [the mid-1990s], the LFPR for older adults—both male and female—has been trending upwards, primarily reflecting improvements in their overall health and ability to continue working even into the so-called "golden years". 11. The LFPR for older adults is truly acyclical [Moving independent of the overall state of an economy].
As of November 2007, the BLS projected that the aggregate LFPR would decline modestly (about 0.3 percentage point) over the half-decade from 2007 to 2012. That outlook reflected two key demographic trends, namely, the aging of the U.S. population, and the ongoing rise in the labor force participation of older adults. Indeed, in the article by Toossi
(2007) in which these BLS projections were presented and discussed, the subtitle effectively captured both of those trends: "More Workers in their Golden Years".
The BLS projected that the participation rates of older adults would continue rising notably over coming years, consistent with the trends that had prevailed since the mid-1990s, Specifically, the LFPR for older adults (aged 55 and above) was projected to rise 2 percentage points by 2012.
"Why did the LFPR for prime-age adults decline by nearly two percentage points from 2008:Q1 to 2013:Q1, given that the rate for this demographic group had been essentially stable over the preceding half-decade?"
Then the Boston Fed answers the question:
"This shift in prime-age LFPR was not a mere coincidence, but instead was caused by the Great Recession and its aftermath; that is, prime-age adults dropped out of the labor force as a consequence of a large and persistent shortfall in labor demand."
And there you have it—it's not Baby Boomers that have been casually shuffling off into retirement that's been the major reason for a declining labor force—it's because we have more and more people in a growing population (immigration and births) who are not being able to enter the labor force because there are not enough jobs (helped by guestworker visas). The jobs (with the multiplier effect) have been offshored to low-wage countries for the past 40 years—and more so since the NAFTA trade agreement.