Monday, February 13, 2012

A Closer Look at the Labor Force Participation Rate and Trends

Last week there was quite a bit of uproar over the BLS Employment Situation Summary for January 2012, specifically pertaining to once in a decade census revisions that the BLS chose to add back in one month (instead of trying to weight them across the last decade and revise 120 months of data). I want to take a closer look at the labor force participation rate and what the impact of the recession has been versus the impact of an aging population and "peak" participation rates from around the year 2000.

Between 1/2000 and 12/2007, there had been a steady decline in the participation rates (to varying degrees of magnitude) of three major groups: the 16-24 population, 25-54 men, and 25-54 women. Since this decline was already in place, we should control for it when trying to discern the impact of just the recession on participation rates. Taking those line slopes and extrapolating them across the 49 months since the recession began (12/2007), we get expected participation rates of:
AgeActual 12/2007Expected 2012Actual 2012Difference
25-54 Men90.990.389.0-1.3
25-54 Women75.574.774.5-.2

In other words, the difference is all that we should truly attribute to recessionary impacts. Looking at the data for the population as a whole, we get an expected participation rate (using the data from the above table) of 64.3% versus the current level of 63.7%, giving us a missing labor force of roughly .6% or 1.453 million people. If we make the assumption that ALL of these people are truly "missing" from the labor force (and hence unemployed), we get an unemployment rate (U-3) of 9.08%.

Of course, this was all going on while the boomers began to move into the much lower historically participating 55+ demographic. And even though the boomers have increased the participation rate in that bracket recently (even during the recession), it is still a drag on the overall participation rate, as those 55+ as a percentage of the civilian non-institutional population aged 16+ has gone from 29.9% of the population to 32.7% (and this will continue to grow over the next decade or so, as the biggest population group (outside of the 55+) now is those 45-54). So even with continued growth in participation rates by the 55+ crowd, they will still drag down the overall participation rate so long as the 55+ participation rate is less than the 54 and under rate. Because of this, we should not expect to see participation rates climb back up much (if at all) unless the participation rate for those 55+ rises at a much more rapid pace.