A White House report released last month (July 2014) analyzed the labor force participation rate since late 2007 (when the Great Recession first began). And almost its entire 53-page report is dedicated to explaining that the main reason for a declining labor force was because of Baby Boomers dropping out or retiring, beginning in 2008 at the age 62. Even though those 55 and older make up a smaller share of the work force, the White House is saying they account for HALF of the drop in the labor force.
And the report also lays blame on the Baby Boomers as "a factor slowing growth of potential real GDP." What follows are a few excerpts from the White House report:
- About half of the decline is due to the aging of the population. Because older individuals participate in the labor force at lower rates than younger workers, the aging of the population exerts downward pressure on the overall labor force participation rate. While older workers today are participating in the labor force at higher rates than older workers of previous generations, there is still a very large drop-off in participation when workers enter their early 60s.
- From the beginning of 2011 to the second quarter of 2014, the participation rate fell by 1.4 percentage points. Around 70 percent of that decline (1.0 percentage point) can be directly attributed to the aging of the population and increased retirements.
- Participation rates have long been influenced by an aging population, however its impact became more pronounced starting in 2008 when the first cohort of baby boomers (those born in 1946) turned 62 and became eligible for early Social Security benefits.
- Starting in 2008, the share of the working age population over age 55 began to rise rapidly. Also, while the share of the population over age 65 has risen gradually since 1960 due to increased longevity, the increase accelerated in 2008 and is now rising faster than at any point since 1960.
- This sharp and predictable retirement of a large cohort coincided with the start of the Great Recession, making it difficult to separate the effects of the economy and normal demographic patterns on participation.
- Even though these baby boomers are more likely to work at older ages than their predecessors, the employment rates at older ages are still much lower than for younger workers.
- Taken together, the aging of the population and the business cycle account for the vast majority of the decline in the participation rate since 2007 in all of the studies. While there are some differences in the share attributed to the aging of the population, the median estimate is that half of the decline is due to aging.
- The largest single factor in the decline of the participation rate since the end of 2007 is the aging of the workforce — something that was predicted well before the Great Recession. Every year since 2000, the Economic Report of the President has mentioned the post-2008 decline in the labor force participation rate as a factor slowing growth of potential real GDP.
- The first baby boomers reached retirement age in 2008, and over the next decade and a half, increasingly-large cohorts of baby boomers will follow suit.
- In 2009, 16 percent of the adult population was at or above the retirement age; the Social Security Administration projects this fraction will grow to 25 percent by 2029, increasing by half over two decades.
- The retirement of the baby boom generation is particularly consequential for the participation rate, because the labor force participation rate falls sharply as workers grow older.
- Because older individuals participate in the labor force at lower rates than other age groups, the shift in the age structure from aging baby boomers is responsible for a substantial portion of the decline in the participation rate.
Aging Work Force, Slack Labor Market — and those Not in the labor Force (The Rebuttal)
For a long time I’ve been arguing that it’s not older people or retirees that are “dropping out” of the labor force that has been driving the low participation rate, but rather “prime-age” people who can’t find jobs.
The charts below from the St. Louis Fed start in April 2000 (when the decline in the LFPR first began) to last month. I’ve been saying that, besides older workers who were laid off and forced to take early retirements, most older workers were working longer and putting off retirements to recoup losses in their 401ks and equity in their homes. (This was confirmed by several AARP surveys as well).
According to the charts below from the St. Louis Fed, it seems to shows that, for older workers, the LFPR has been pretty much steady since the crash of 2008, but prime-age people show a huge decline since the recession. (Any comments? Am I looking at the data wrong?)
Last year I wrote that the employment-population ratio was at a 30 year low; and that the labor force participation rate was at a 35 year low. This post addresses some of the current debates as to "why", and what some economists call "secular stagnation" related to a weak labor market and stagnant wages. The slack in the labor pool, I argue, is due to an over-saturated labor market. The unemployed (and those dropping out of the labor force) are mostly "prime age" potential workers — and not those who are "aging" or "retiring" — but mostly those who the Bureau of Labor Statistics and economists (and now, the White House) are saying are "dropping out" of the labor force or retiring.
Below in the first chart is the "employment rate" and the "labor force participation rate " for prime-age workers (ages 25-54) from April 2000 (when the long decline first began) to July 2014. And the second chart compares the participation rate between the 25-54-year-old group and the 55-and-over group for the same period. This seems to totally contradict the White House report, which defies logic and common sense.
Recently from the Financial Times (by Adam Posen) Keep Interest Rates Low until the Hidden Jobless Return to Work:
There has been a legitimate debate over what lies behind the low U.S. labor force participation rate, which measures the proportion of adults who are either working or looking for work. Some blame demographics, with two large cohorts (ageing baby boomers and women of child-bearing age) both disproportionately likely to leave the workforce. Others take a different view, arguing that wages are being held down in areas of the country where statisticians count more people as unemployed or no longer looking for work. (Also read: Wages and Labor Market Slack).
The aging of the U.S. population, cyclical factors [defined] related to the Great Recession and a mysterious third factor seem to be behind the widely discussed decline in the labor force participation rate, according to the White House Council of Economic Advisors.
Writing for the economic research site VoxEU.org (Understanding the decline in the labour force participation rate in the United States) the economists who advise President Obama lay out their data and analysis to explain a trend that some critics have blamed on Obama's policies.
The key turning point was in 2008, though better known as the global financial crisis. It was also the beginning of a U.S. retirement boom as the first baby boomers (born in 1946) turned age 62 and became eligible for Social Security benefits, adding that “this decline, however, was amplified by the recession". They thus calculate that aging accounted for about half the decline in workforce participation.
* Editor's Note: It should be noted that almost half of all Social Security retirements since 2008 were early ones (with reduced benefits at age 62), and one reason may be because, as older workers who were caught early in the massive layoffs, they became "long-term unemployed" early into the Great Recession and were never rehired again. And those who went on Social Security disability since 2008 only account for a very tiny fraction of the entire labor force. (Here is Brad Delong's and another rebuttal to the VoxEU.org article.)
And what is the point of counting people who are retiring as an argument for a declining participation rate by saying "demographics" or "an aging work force" is the cause (or the main cause) — just because they chose to be retired (or were forced out of the job market)?Last year the U.S. had a record number of American workers who retired on Social Security: 1,171,737 — and we also had a record number of high school graduates as well: 3,092,290 (almost 3 times as many.) So with 1 million retiring and 3 million graduating from high school every year (not counting dropouts or college grads), and only an average of 350,000 people per year since the recession that were added in payment status to the Social Security disability rolls, then attributing "half" the decline in the labor force to an "aging population" is not an accurate assessment.
Reader's comment at Mark Thoma's blog: "The 25-54 cohort is the *core* working age cohort for which we have data available. It is the *biggest* deal in terms of employment data. It would be nice to have 18-65 but that doesn't seem to be collected — probably to avoid the inclusion of "college age" students (very broadly defined) and "early retirees" (very broadly defined). Given the employment disaster for college grads since 2008 (or 2000, if you want to look further), the exclusion of 18-25 year olds *helps* the very weak employment ratio. The employed-to-cohort-population measurements are *percentages* — so the aging of Boomers, etc. is irrelevant. The question is why 2014's group of 25-54 are having a much harder time finding jobs than 1999's group of 25-54."
(Now back to the Financial Times article)
Meanwhile, there is growing evidence that long-term unemployment, or even under-employment, does lasting damage to the ability of younger people to find work that pays well throughout their working lives. Under current conditions it is labor slack that does lasting damage, whereas brief inflationary episodes will have only a transient impact.
There are clear indications that wage growth is being kept down by the overall state of the labor market, and raising rates would further depress demand. Allowing excess unemployment to persist is likely to do more lasting damage than allowing inflation to rise above the target
As Fed chairman in the 1980s, Paul Volcker was right to resist calls to loosen monetary policy in the face of high unemployment, at a time when spiraling inflation would have done lasting damage. Now the risks are reversed, and the right course is to hold off rate rises to tackle persistent unemployment that threatens permanent harm. This, too, will attract criticism. But, like their predecessors, Ms Yellen and the Federal Open Market Committee need to hang tough.
* That article at the Financial Times was written by Adam Posen, president of the Peterson Institute for International Economics in Washington D.C., who was once a member of the Monetary Policy Committee of the Bank of England. He also sits on the panel of economic advisers to the U.S. Congressional Budget Office. Posen's other positions include being a member of the Council on Foreign Relations and the Trilateral Commission — as well as other groups. He has been the recipient of major research grants from the European Commission, the Sloan Foundation, the Ford Foundation, and the German Marshall Fund of the United States.
Now here is the Atlanta Fed, recently discussing whether or not there is any pressure for employers to raise wages — and my comment (without links), which was left for moderation, but was edited as follows:
With such a large pool of untapped labor — almost 10 million currently "counted" as unemployed — and with another 11 million "not in the labor force" since the recession officially ended (June 2009), I doubt if any pressure on compensation will soon break loose. Add to that — more offshoring, automation/robotics, a rise in part-time work and more H-1B visas — and I hardly see any reason why the "job creators" will feel any need to raise wages (unless of course, the federal and state minimum wages laws force them to do so). As it is now, when many employers can, they will use wage theft with undocumented workers and reclassify many others as "independent contractors". So where's the pressure to raise wages?
Final Note: The Labor Force is Shrinking for Lack of Jobs and not because baby boomers are shuffling into retirement — and that's Why a Basic Income will Eventually be Needed. For a long time I’ve been arguing that it’s not older people or retirees that are “dropping out” of the labor force that has been driving the low “participation rate”, but rather “prime-age” people who can’t find jobs. The White House reports is lipstick on a pig.