Wednesday, August 20, 2014

White House: "Boomers Reason for Declining Work Force"

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.

LFPR - Fed

LFPR - Fed

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).

From Think Advisor:

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)?

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."

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.

(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.

6 comments:

  1. And the argument of whether or not job growth is keeping up with population growth is out the window. It doesn't matter if over the last 5 years we had ZERO population growth, if within the CURRENT population we've had 3 million a year graduating from high school, 1 million a year retiring, and only 2 million (net) new jobs a year being created during that same time. That would just be "breaking even", but wouldn't account for the 8.5 million jobs lost during the recession, the 10 million currently counted as "unemployed" AND an INCREASE of 11 million "not in the labor force" since the recession supposedly ended. The White House report is just smoke and mirrors.

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  2. Based on new estimates derived from the monthly Current Population Survey (CPS), real median annual household income is now 3.1 percent below that of June 2009 when the "great recession" officially ended.

    Adding this post-recession decline to the 1.8-percent drop that occurred during the recession leaves median annual household income now 4.8 percent below the December 2007 start of the recession.

    But compared to January 2000 (about the time when the labor force participation rate began its long decline) the real median annual household income is now lower by 5.9 percent.

    SOURCE: Sentier Research
    http://us3.campaign-archive1.com/?u=314e77f24e2090b088249fbd5&id=e92e921d0a&e=629cbfe0d5

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  3. Reuters: Many who have left U.S. labor force say they would like to return
    SOURCE:
    http://www.reuters.com/article/2014/08/20/us-usa-fed-labor-insight-idUSKBN0GK0BH20140820


    A new Reuters/Ipsos poll of those 18 and older who were unemployed or retired found that:

    34 percent said they had stopped looking for work because the job market was so bad.

    40 percent said they were no more optimistic about their job search today than when they initially stopped working.

    40 percent of retired workers said they would have preferred to keep working, and 30 percent said they would go back to work if the right job came along.

    44 percent said they had not worked in the past five years; although nearly two thirds of those people were close to or had reached retirement age when they stopped working.

    The labor force participation rate for people aged 25-54 - considered the prime working years - has dropped from 84 percent in 2000 to just 81.4 percent in 2014 (a fact economists have found difficult to explain.)

    And the number of people unemployed for six months or more still stands at 3.2 million - nearly triple the number in the months before the last recession hit in 2007.

    Other research, noted with concern at the Fed and elsewhere, has found a decline in demand for higher skilled and better educated workers. That means college graduates may be competing for positions further down the "job ladder," pushing the less skilled to the margins. (Editor's Note: College grads are taking jobs that high school dropouts used to do.)

    There is evidence as well that the jobs which are being created are those that pay less, perhaps adding to the level of income inequality in the U.S. and undermining the spending power of households. A higher federally mandated minimum wage could help to address this, though critics say that could hurt jobs growth and risk a much higher inflation rate.

    Editor's Note: The critics are those who shill for the CEOs, who would tell you that if they raised the minimum wage, they would have to cut hours, lay off workers and pass the added cost to consumers --- instead of buying one less mansion, settling for a smaller yacht, or taking any cut in pay for themselves.

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  4. Employers always try to exploit labor for lowest cost. Wages will not go up and manufacturing jobs will not come back as long as overseas workers are paid 50 times less than Americans for the same job (15 cents an hour). And there are many places where labor is still dirt cheap. http://www.thedailybeast.com/articles/2014/08/23/made-in-china-now-being-made-in-africa.html

    We can't protect low skilled jobs, but we need to keep the skilled jobs like R&D from being outsourced overseas or being taken over by H1B visa holders.

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  5. You baby boomers are the most selfish generation to ever exist. You destroyed your own children's and grandchildren's future with your short-sighted selfishness and immaturity. And then you expect them to pay for your retirement????

    Can you baby boomers just hurry up and drop dead, please?

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  6. Robert Reich (November 2014)

    "People with college degrees continue to earn far more than people without them. And that college “premium” keeps rising. Last year, Americans with four-year college degrees earned on average 98 percent more per hour than people without college degrees. In the early 1980s, graduates earned 64 percent more [but] a college degree no longer guarantees a good job. The main reason it pays better than the job of someone without a degree is the latter’s wages are dropping. In fact, it’s likely that new college graduates will spend some years in jobs for which they’re overqualified. According to the Federal Reserve Bank of New York, 46 percent of recent college graduates are now working in jobs that don’t require college degrees. Employers still choose college grads over non-college grads on the assumption that more education is better than less. As a result, non-grads are being pushed into ever more menial work, if they can get work at all. For years we’ve been told globalization and technological advances increase the demand for well-educated workers. This was correct until around 2000. But since then two things have reversed the trend. First, millions of people in developing nations are now far better educated, and the Internet has given them an easy way to sell their skills in advanced economies like the United States. Hence, more and more complex work is being outsourced to them. Second, advanced software is taking over many tasks that had been done by well-educated professionals. As a result, the demand for well-educated workers in the United States seems to have peaked around 2000 and fallen since. But the supply of well-educated workers has continued to grow. The New York Times calls them "Generation Limbo" --- well-educated young adults “whose careers are stuck in neutral, coping with dead-end jobs and listless prospects.” A record number are living at home. Given all this, a college degree is worth the cost because it at least enables a young person to tread water. Without the degree, young people can easily drown." (MY NOTE: I guess that at this rate, one day they'll need a PhD to mops floors.)

    http://robertreich.org/post/103472733520

    Timothy Taylor (November 2014)

    "The age group with by far the biggest rise in those saying they don't want a job since 2000 is the 16-24 age group ... We are in the midst of a social change in which 16-24 year-olds are less likely to want jobs. Some of this is related to more students going on to higher education, as well as to a pattern where fewer high school and college student are looking for work. I do worry about this trend. For many folks of my generation, some evenings and summers spent in low-paid service jobs was part of our acculturation to the world of work. As I've noted in the past, I would also favor a more active program of apprenticeships to help young people become connected to the world of work.

    http://conversableeconomist.blogspot.com/2014/11/underutilized-labor-in-us-economy.html

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