Unemployment, Participation & Demographics - Analyst Blog

One of the biggest negative data points in last Friday's employment report was the drop in the labor force participation rate to 64.0% from 64.2%. The participation rate is the percentage of the population over age 15 that is either employed or unemployed, as opposed to out of the workforce altogether. (Retirees and stay-at-home moms/dads are examples of people not in the workforce.)

The drop in the participation rate accounted for more than half of the surprising drop in the unemployment rate to 8.6% from 9.0%. However, the drop in labor force participation is a long-term trend, dating from 2000, and exacerbated by the economic slowdown. It is mostly driven by demographics. From the mid-1960's through 2000, two demographic forces led to a huge rise in the participation rate: the entry of the Baby Boomers into the workforce, followed by more women working.

Here is the long-term history of participation rate, along with a related statistic, the percentage who are actually employed. I also overlaid the unemployment rate (right scale). Provided the percentage of people working does not change, a fall in the participation rate will lower the unemployment rate, and changes in the participation rate are just as powerful as changes in the employment rate in determining the unemployment rate. The employment rate though tends to be the more volatile of the two.

So what is likely to happen to the participation rate going forward? The second graph (from http://www.calculatedriskblog.com/) looks at the different levels of participation in the workforce by age, over time. The snapshots are for every five years, and each bracket also covers five years. Thus, the same person who was in the dark blue 20-24 group in 1990 will be in the 25 to 29 light blue group in 1995.

A few things jump off the graph at me. The first is that teens no longer work at the rate they used to, even leaving aside the just plain awful current unemployment rate of 23.7%. The second is that as people move past age 55, they are far less likely to be in the work force than between the ages of 25 and 54, but that this is much less so than in 1990. That pattern holds for each age bracket over 55.

The mix of jobs in the country has shifted away from things like manufacturing and mining and towards service type jobs, most of which require less physical labor. Also, medical advances mean not just that people are living longer (although the biggest part of the long-term rise in life expectancy has come from lower infant mortality) but they are also able to live more active lives in their late 60's and early 70's. It looks like 70 really is the new 60.

Some of it, though, could be due to less income security. A person who retired at age 65 in 1990 was far more likely to have a private sector defined benefit pension than someone who retired at age 65 in 2010.

It is somewhat surprising to me that the rise in the participation rate from 2005 to 2010 for the older groups was not significantly different than the rise between 2000 and 2005. I would have expected that the massive loss in housing wealth between 2005 and 2010 would have caused more of the "young old" to want to continue to work. In any case, it looks like the competition for Wal-Mart ( WMT ) greeter jobs has gotten more intense over the years.

Given that the front edge of the Baby Boomers are now moving into the 65-69 bracket, and the back end is moving from the 45-49 bracket to the 50-54 bracket, the jump-from-group-to-group effect is likely to overwhelm the upward movement within the older groups.

Thus it looks like the labor force participation rate for the economy as a whole is likely to continue a gradual downward path. With it, so should the natural rate of unemployment. This, however, is going to be a gradual process, but it is a trend that should continue for many years to come.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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