Labor Participation Rate: No Cause for Alarm

Perhaps the single biggest source of handwringing among economic commentators has been with respect to the declines in the labor force participation rate observed since it peaked in 2000, some 15 years ago.   When economists think about the labor force participation rate, they are generally studying how many people in the typically defined working age population, say 20-65 years of age, are in the labor force, employed or unemployed.  The headline data1 that most people see in the press from the Bureau of Labor Statistics is actually measures labor force participation from age 16 and over.  The headline labor force participation rate plateaued between 1997 and 2000 with an average of 67.1% of Americans working.  In the past twelve months it has averaged 62.8%, a 6.5% proportional decline (Figure 1).  Yet the unemployment rate is only modestly higher now (5.5%) than it was on average from 1997 to 2000 (4.4%).

Figure 1. Until Death Do Us Part

What happened to everyone else? Have they given up hope and left the labor force? Is there additional slack in the labor market that exists beyond that measured by the unemployment rate? Should we be alarmed by the headlines that civilian labor force participation rate is the lowest since 1978?!

The truth, it turns out, is more complicated. Much of the focus on headline labor force participation is misplaced in large part because few commentators bother to mention the exact definition: civilian labor force participation rate for those sixteen and over. Notice, that I is not until retirement age. It is to infinity (or death, whichever comes first –and to the best of our knowledge it is always the latter).

As the population ages and more people live past the retirement age, we should expect to see the labor force participation rate decline.Therefore, as the population ages and more people live beyond retirement age, we should expect to see the labor force participation rate decline. In fact, labor force participation has been declining since the 1950s for men for precisely this reason. The only reason why the overall rate of labor force participation has not declined was because of the slow but steady mass-entry of women into the labor force from the 1950s until around the year 2000 (Figure 2).

Men’s labor force participation remained above 85% for the entire decade of the 1950s. In March 2015, it was only 71.9%. Has the unemployment rate among men doubled over the last six decades? Sort of, except that we would refer to most of those men as retirees. In 1950 only 11.6% labor force age Americans were above the age of 65. By 1980 that had risen to 16.6% and in 2015 its 20%. Thus a very large portion of the decline in male labor force participation for the 16-death crowd appears to be related to an aging population. Remember: the fact that the economy is able to comfortably support a larger and larger number of non-working people is not a sign that we have become poorer. Rather it is proof that we are vastly better off today than we were fifty or sixty years ago.

Figure 2: Men Are From Earth, Women Are From Earth but They Have Different Participation Rates

Moreover, there is every reason to expect that labor force participation measured by the 16-death statistic will continue to decline. By 2050 27.5% of Americans over 20 will also be over the age of 65 (Figure 3). Unless the retirement age is raised a great deal, labor force participation will continue to decline for this reason alone.

This is not to suggest that the economy doesn’t have problems. Labor force participation for those in their prime working age (25-54) has also been declining. However, the proportional decline has been much less: from 84.2% on average in 1999 and 2000 to 80.9% today. This is approximately a 3.9% proportional decline, just a little bit more than half the 6.5% drop in headline labor force participation (Figure 4).

Figure 3. Moving on Up

Figure 4. Prime Time

The participation rate among those 25-54 is at its lowest since 1985. Were things in 1985 really so bad? 1985 was the year after President Reagan was re-elected with 58.8% of the popular vote on a theme of, “It’s morning again in America.”

Unfortunately, the Bureau of Labor Statistics does not yet break the 25-54 civilian labor force participation rate down by gender. So we don’t really know for certain who has been leaving the labor force and why. There could be a fairly innocent explanation: more women and men are choosing to stay home with children and let their partner work. To the extent that this explanation is valid, it suggests that the economy is able to comfortably support more and more non-working people of working age as well as a growing population of retirees.

There are also more sinister explanations: the rapid advance in technology and/or the financial crisis have eliminated large numbers of jobs and made some people’s job skills obsolete. As a counterpoint, the rate of payroll growth in the private sector has been 2.1% per annum during the current expansion which began in February 2010. This is 1.5x the previous expansion in private sector payrolls which lasted from July 2003 to December 2007. During that period private sector payrolls grew just 1.4% per annum. This hardly suggests that the labor market is about to be sucked behind the event horizon of an imminent technological singularity that will make human labor obsolete.

Technological advance is an issue for labor, however. 200 years ago 95% of Americans were involved in agriculture (a significant portion of them against their will). Now only around 2% of Americans are employed in the agricultural sector. In the 1950s around one third of Americans held factory-related employment. Today fewer than 10% do. As technology continues to advance, it might be possible that larger and larger numbers of service sector workers will be sidelined and that the very nature of work will change as it did when we evolved from an agrarian to an industrial and then to a service based economy.

Those are all long term issues that we don’t know the answer to. In the short term, however, the decline in the labor force participation rate is nowhere near as alarming as it first appears. Moreover, it will not likely be a major factor in causing the Fed to delay normalizing interest rate policy.

References

1. See “Civilian Labor Force Participation Rate” from the US Bureau of Labor Statistics (source code LNS11300000) at http://data.bls.gov/timeseries/LNS11300000, or for the same data in the popular St. Louis Federal Reserve FRED database (source code CIVPART) or on the Bloomberg Professional (source code PURSTOT ).

 

All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only.  The views in this report reflect solely those of the authors and not necessarily those of CME Group or its affiliated institutions.  This report and the information herein should not be considered investment advice or the results of actual market experience.

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About the Author

Erik Norland is Executive Director and Senior Economist of CME Group. He is responsible for generating economic analysis on global financial markets by identifying emerging trends, evaluating economic factors and forecasting their impact on CME Group and the company’s business strategy, and upon those who trade in its various markets. He is also one of CME Group’s spokespeople on global economic, financial and geopolitical conditions.

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