The October unemployment report showed a record low labor participation rate of 62.8%, graphed below. Many dismiss these record low labor participation rates by claiming more people are retiring and young people are just in school. Is this true or is something more sinister going on? Are people simply dropped out of the labor force who in fact really need a job are is it as they say, older Americans are enjoying their golden years, no longer needing to work and all the kids are just lining the higher education halls?
It is true the labor participation rate has declined since 2000, about a percentage point from that time until just before the recession. Yet after October 2007 the labor participation rate has declined by 3.2 percentage points, a much faster rate than before the recession. The labor participation rate is a ratio of the population, not locked up somewhere, sick or in the military, age 16 or older, who are participating in the labor force by either looking for a job or have one.
To take a look at the finite details of labor participation, we must use raw data for seasonally adjusted labor statistics are not available at this level of granularity. To get any sort of validity from using not seasonally adjusted data, we must compare figures to one year ago to remove seasonality from the patterns. Labor markets are highly seasonal, think summer jobs and temporary holiday help and one gets the idea. For this analysis, we're going to use October as our month to compare to past years since this is the most recent month available for labor statistics. Bear in mind there is a month to month margin of error with the BLS current population survey unemployment statistics. Below is the labor participation rate, not seasonally adjusted, for just the month of October going back to 1999.
As we can see the not seasonally adjusted labor participation rate using just October month's has declined by 3.1 percentage points since October 2007. With this decline as our baseline, the below graphs show the labor participation rates by age, broken up in the finest age increments available. Note the age brackets in each graph as the data was broken up for readability.
We can see from the above young people are participating dramatically less in the labor market now in comparison to 1999. We can also see more people over the age of 60 are either working or looking for work as well. We question why the labor participation rate plunged for teenagers and suspect that they have been pushed out of those burger flipper and agriculture summer jobs by illegals and older workers. Regardless of the reason, their plunging labor participation rates are why many pundits and even economists claim the overall decline in labor force participation is nothing to worry about. Read on to see if that is true.
The labor participation rate is all of the people not infirm, in the military or locked up somewhere who are either employed or actively looking for work. When one calculates labor participate rates by age bracket, the aging population is already accounted for for the figure is calculated from the age of a person at that time. The Labor participation rate is the civilian labor force divided by the civilian noninstitutional population and by age, it is the same calculation.
Below is a pie chart showing the breakdown of the civilian noninstitutional population by age for October 2013 and this is not seasonally adjusted. We're going to use this breakdown of the population by age to prove again that the dropping labor participation rate is not due to retirement or more young people going to school as this myth, which is continually perpetuated without fact or figures, needs to be dispelled.
The above pie chart is ridiculous to look at, we know. The point of this very busy pie chart is to show we have the data to break down the population from where the labor force will come from by age and at a moment in time. Therefore, we can calculate what the contributions to the overall labor participation rate decline are per age group for a given time period. People get older over time and move into different age brackets, but no worries, we can account for that fact to get some answers on labor participation.
Below is the change per age brackets in October to October not seasonally adjusted labor participation rates for 2012, 2009 and 2007. We can see that young people have just imploded in their labor market participation, yet those over the age of 65 are participating more than in the past.
We can assuredly assume people ages 30 to 59 are in their prime working years and thus eliminate the claim the baby boomers are causing the labor participation rate to drop as well as young people all magically going into massive debt as they are all in higher learning institutions. Additionally, we remove some age discrimination from our examination by removing the 25 to 29 and 60 to 64 year olds out of the equation to see what's going on with labor participation rates. Of course this increases the focus on the peak earning age groups, even though obviously 25 year olds and 60 years olds still need to make rent like everybody else. People do go back to school at all ages, yet let's assume age 30 to 59 year old students not working while attending school are a very small percentage or this population group.
We can then weight the 30 to 59 year old labor participation rate by their percentage of the civilian noninstitutional population, thus getting their contribution to the overall labor participation rate for those aged 16 and older. How this weighting is done for all age brackets is to multiply the percentage of the total noninstitutional population each age bracket is (our ugly pie chart above), by the labor participation rate for that age bracket.
For just the age group of 30 to 59 year olds, they account for 0.73 of the 0.96 percentage point drop in the overall unadjusted labor participation rate from a year ago. The same age group is responsible for 2.29 of the 2.06 percentage point drop in the overall unadjusted labor participation rate from October 2009 to October 2013. The reason the 30 to 59 year olds 2009 to 2013 labor participation rate plunge is greater than the overall decline is due to older workers increasing in their labor participation as shown in the above graphs for ages 60 and above. From October 2007 to October 2013 the 30 to 59 year olds participating in the labor force accounted for 3.0 of the 3.1 percentage drop in the labor participation rate, unadjusted, using October to October labor force statistics.
In other words, the 30 to 59 year olds, who make up 50% of the population which has the potential to work, account for pretty much all of the labor participation rate plunge since 2007. This same age group accounts for three quarters of the labor participation rate decline of the past year.
Anyone who insists the record low labor participation rate is due to baby boomers and people retiring is flat out wrong. It is clear the labor participation rate is dropping for people in the prime working years. Any way one slices it, the shrinking labor force is not due to baby boomers or magically all young people went off studying their hearts out. Anyone can do the above exercise to prove it. All one needs is a spreadsheet, access to the Internet to obtain BLS data and a hell of a lot of time.
If the above did not convince you the labor participation rate has declined due to a lack of jobs and people dropping out of the count, you might read this post from 2012 showing the same results, but with more robust data by using moving annual averages of labor participation rates by age. For those pointing to the one percentage point drop in labor participation from 1999 until 2007, may we remind those folk there was another recession, 9/11 happened, the dot con bust occurred and offshore outsourcing started in earnest.
Finally, if one still isn't convinced there is a very fast reality check labor participation is declining in the prime working years. The BLS publishes a seasonally adjusted monthly labor participation rate for those between the ages of 25 and 54. For all those people who believe it is perfectly ok to age discrimination against workers in their 50's or believe people can retire early as a rule (they cannot), this is the metric to look at. Since a year ago, the labor participation rate for 25 to 54 year olds has fallen by -1.0 percentage point. From October 2009, the labor participation rate for 25 to 54 year olds declined by -2.0 percentage points and from October 2007 there is a -2.2 percentage points rate drop in the labor participation rate for this age group.