Monday, May 07, 2012

Demographics Account for 50% of Decline in LFPR

As an update to yesterday's post about the possible contribution of demographic effects on the recent decline in the U.S. Labor Force Participation Rate (see chart above), here are excerpts from two Federal Reserve research reports on the topic.

1. From the conclusion of "Interpreting the Recent Decline in Labor Force Participation," by Willem Van Zandweghe at the KC Fed (emphasis mine):

"The sharp decline of the LFPR since the onset of the recent recession is due to long-term shifts related to demographic trends and to the cyclical downturn in the labor market. A variety of evidence indicates that, on balance, trend factors account for about half of the decline in labor force participation from 2007 to 2011, with cyclical factors accounting for the other half."

2. From the conclusion of "Explaining the decline in the U.S. labor force participation rate," by Daniel Aaronson, Jonathan Davis and Luojia Hu of the Chicago Fed (emphasis mine):

"Labor force participation has fallen significantly over the past decade. At least some of this decline is due to the recent deep recession and lackluster recovery. Additionally, for quite some time, economists have forecasted that shifting demographics, particularly in the age structure of the population, would put downward pressure on labor force activity. We estimate that just under half of the decline in LFPR since 2000 is due to such factors. We expect these demographic patterns to continue for at least the next decade, and likely far beyond, as the large baby boom cohort continues the transition into retirement. Therefore, standard labor market measures used to compute gaps in resource utilization, such as the employment-to-population ratio and the LFPR, should reflect these long-running patterns."

Bottom Line: Both research reports come to the same conclusion that about half of the decline in the LFPR in recent years is due to long-term demographic trends and the other half of the decline is from the cyclical factors relating to the 2007-2009 recession.    

HT: Marmico

29 Comments:

At 5/07/2012 10:01 AM, Blogger Frank said...

Ok - so last month, 342,000 people disappeared from the labor force. This study claims that 171,000 of them is due to demographic forces.

it is also estmated that 7.7 million people dropped out of the labor force during the past three years. So...3.85 million of them are retirees that never intended to continue to work.

Really...REALLY? Or is this just another attempt to convince us that current policies are not to blame.

I, Sir, remain deeply skeptical.

 
At 5/07/2012 10:03 AM, Blogger JMS said...

I cannot reconcile this post with the numbers here, http://www.qando.net/?p=12967, which show that since January 2008, the percentage of the population older than 55 that is employed has been flat, while the age groups younger than that have been leaving the workforce -- with the most striking drop in participation in the under-24yo category.

 
At 5/07/2012 10:08 AM, Blogger Jon Murphy said...

So...3.85 million of them are retirees that never intended to continue to work.

Don't forget it's not just retirees. Folks who decide to go into the military are not part of the labor force. Folks who opt to go back/stay in school are not part of the labor force. Folks who decide to stay at home and raise a family are not part of the labor force.

Demographics refer to much more than just age.

 
At 5/07/2012 10:37 AM, Blogger Larry G said...

If the discrete demographic sub-groups were plotted (available) ... you could see the trends for each subgroup as Jon posits and it's likely that they are not identical trends.

the other thing is that the military is steadily shedding personnel now that the two wars are winding down.

Many folks who exited the military often went into law enforcement, public safety, other local govt jobs, etc but those jobs have been eroded by the housing meltdown that provided the tax revenues that funded most localities.

local govts now days are much thinner.... and not hiring....

 
At 5/07/2012 10:49 AM, Blogger juandos said...

This 50% sounds like a bit of a reach to me...

People I know that were making plans in '06 and '07 to retire in '11 and '12 have put all that on hold...

I can't be the only who knows people like that, can I?

I think the demographic spin is being over ridden by by the large numbers of people who lost work the last three years...

What I wonder is how many of the people who've lost their jobs over the last three years did it so because they didn't want to make an adjustment to their lives that was demanded by their employers?

 
At 5/07/2012 10:50 AM, Blogger Jet Beagle said...

Both of these studies seem seriously flawed. Both group persons aged 55 to 64 with older populations. These are not retirees. And the 55 to 59 group represents the first half of the Baby Boomer peak.

A research study which groups 55 year olds with retirees will find demographic correlations between age and workforce participation - and then claim demographics account for the variation. But that sloppiness doesn't make such a study valid.

 
At 5/07/2012 10:53 AM, Blogger morganovich said...

this seems somewhat inconsistent with the fact that the wf participation rate for 65-69 and 70-74 year old groups are actually up.

it seems that more old folks are working longer which pushes UP the wf participation rate. the 55+ wf part rate is unchanged over the last 4 years. the losses have all come among the young.

the % claiming early retirement with social security dropped to the lowest level since 1976 last year.

further, this whole notion that folks hitting 65 reduces the wf participation rate seems questionable to me.

when someone retires, that does not destroy a job. generally, someone else fills it. if your sales guy retires, you hire a new one. given the current number of unemployed, this ought not to be difficult. this demographic argument from the fed seems specious in that it assumes that the job of a retiree goes away, but seems not to look at the folks entering the workforce.

the group of 20 year olds just entering prime working years is considerably larger than the group of 65 year olds at the moment.

http://www.census.gov/prod/cen2010/briefs/c2010br-03.pdf

good graphic on p3.

this fed argument seems based on dubious logic and only half the demographic picture.

why would retirees cause jobs to disappear when so many are entering the prime working years and eagerly seeking to fill in?

this makes me think that this has a greater cyclical component than the fed is arguing.

 
At 5/07/2012 11:02 AM, Blogger Jet Beagle said...

from the Chicago Fed study:

"just under half of the post-1999 decline in the U.S. labor force participation rate ... can be explained by long-running demographic patterns, such as the retirement of baby boomers."

How can that be? Almost none of the baby boomers have reached full retirement age and only a tiny percentage have even reached early-retirement age. Those boomers over age 55 who are not working did not choose to retire. They were laid off and found few employers who wanted to take risks with older workers.

 
At 5/07/2012 11:21 AM, Blogger morganovich said...

jet-

agreed. the number of folks above 70 is about the same as it was in 2000.

the number of folks between 65 and 70 is up about 2 million which could not account for anything like half of the drop in wf participation. even if every one of them retired, that would not even account for 1/3 of the drop, and that still does not answer the question about what happened to the jobs they would have left.

 
At 5/07/2012 11:39 AM, Blogger bart said...

Larry G, the chart you asked for:


http://www.nowandfutures.com/download/d4/LaborParticipationRateByAgeGroup1948-2012.png

 
At 5/07/2012 11:41 AM, Blogger bart said...

... and I still believe that Fed study is extremely weak, and that the whole participation rate change game contains more than a little "vested interest bogus influence".

 
At 5/07/2012 11:56 AM, Blogger morganovich said...

bart-

that's a really interesting chart. it seems to show that the young are the one who really took it on the chin in this recession and the the oldsters are actually working more.

that seems consistent with a cyclical explanation to me. in tough times, the young have trouble getting in and the old are unable to retire.

i suspect that there are some long term trends in the data where the young are in school longer and so out of the workforce driving long term declines in those wfp %'s, but the sharp drops in 2008 seem likely to be based on the economy as opposed to demographics. it's too sharp a move and the affected parties are just who you would expect them to be in a tough economy.

 
At 5/07/2012 11:59 AM, Blogger juandos said...

Well the one basic situation that isn't being addressed is that if people are 'retiring' from employment positions that would normally mean there are jobs open now, open for younger people but that's not what's happening...

I don't mean there should be a one for one replacement per se but what's happening now doesn't seem to bolster the explanation being offered here...

 
At 5/07/2012 12:02 PM, Blogger Benjamin said...

I have to say, I look at the chart that Dr. Perry has provided, and labor participation rates crest exactly with the onset of the Bush jr. Recession and Financial Collapse.

If there ever again is a healthy demand for labor, I think a lot of people would take jobs, those same people who now are not seeking work.

However, as long as the Fed asphyxiates the economy, and people can get SSDI or join the military, look for declining labor participation rates.

 
At 5/07/2012 12:09 PM, Blogger bart said...

JOLT job openings against various unemployment measures:


http://www.nowandfutures.com/images/jolt_jobs_per_unemployed.png

 
At 5/07/2012 12:25 PM, Blogger juandos said...

"I have to say, I look at the chart that Dr. Perry has provided, and labor participation rates crest exactly with the onset of the Bush jr. Recession and Financial Collapse"...

Ahhh, the pseudo benny making sure he reminds everyone he has no idea what he's babbling on about...

What? Nothing from wikipedia that's totally unrelated to the topic pseudo benny?

 
At 5/07/2012 1:33 PM, Blogger Benjamin said...

Juandos-

Bilious and flatulent ad hominen comments are better reserved for toilets, not economics blogs.

 
At 5/07/2012 1:55 PM, Blogger Larry G said...

@Bart - thank you. I was thinking of other demographics also.

for instance, most who join the armed services or go to school are relatively young, right?

 
At 5/07/2012 2:05 PM, Blogger bart said...

Godspeed, Larry G.

The charting game can always use more hard facts.

 
At 5/07/2012 2:10 PM, Blogger juandos said...

"Bilious and flatulent ad hominen comments are better reserved for toilets, not economics blogs"...

You're absolutely right pseudo benny, you're a toilet of unending and undaunted stupidity...

Hmmm, you remind me of somebody...

 
At 5/07/2012 2:38 PM, Blogger PeakTrader said...

Both Fed papers don't take into account an intertemporal model that when U.S. consumption exceeded production in the 2001-07 expansion, because of low prices and interest rates, a period of production exceeding consumption follows, to compensate for the overconsumption.

When an intertemporal model is included, it suggests many of the 80 million Baby-Boomers (born between 1946-64) were forced into retirement, because the Obama Recovery is even weaker (in the time period) than the actual data show.

Also, I may add, many government workers lost their jobs in the Obama Recovery. Perhaps, they retired in their 50s and weren't replaced. Baby-Boomers 55 and over is a fast growing group.

 
At 5/07/2012 2:39 PM, Blogger Jet Beagle said...

Here's the recent change in labor force participation rates by age group:

LFPR % change, 2000 to 2010

25-29 -2.5
30-34 -2.3
35-39 -1.2
40-44 -1.9
45-49 -1.9
50-54 -0.5
55-59 +4.4
60-64 +8.0

Source: Labor Force Statistics from the Current Population Survey

How is it, again, that demographics explains 50% of the 3.3% overall drop in LFPR?

Remember, the largest population bulge - those born 1956 to 1964 - were all in the 45-49 and 50-54 groups in 2010.

 
At 5/07/2012 5:28 PM, Blogger Henry H said...

Jet Beagle,

Great numbers. Do you have the LFPR% to go with the LFPRC% change?

Thanks ahead of time.

 
At 5/07/2012 5:41 PM, Blogger Jet Beagle said...

henry h,

You can get the LFPR's for the various age groups here. It will take a little work.

 
At 5/08/2012 9:53 AM, Blogger VangelV said...


Bottom Line: Both research reports come to the same conclusion that about half of the decline in the LFPR in recent years is due to long-term demographic trends and the other half of the decline is from the cyclical factors relating to the 2007-2009 recession.


This is nonsense on stilts. The fact is that many people who would have chosen to retire are staying in the work force thanks to bubbles that destroyed the purchasing power of their holdings. The predictions that were made during the good times did not come true because circumstances changed.

This is the problem with economic models. People are not inanimate objects driven by natural forces. They respond to stimulus and will change their behaviour as economic situations change.

Sorry Mark but the bus is hurtling towards the cliff. Expect the Fed and other CBs to flood the system with money in a desperate attempt to save the economy one more time. If what you claim were true the Fed would not be in an all out panic. What should scare you at this time is that Bernanke seems to be the hard liner in Obama's Fed. Imagine what happens when Yellen and the doves take over.

 
At 5/08/2012 10:50 AM, Blogger Jet Beagle said...

vangeIV: "The fact is that many people who would have chosen to retire are staying in the work force thanks to bubbles that destroyed the purchasing power of their holdings."

I agree.

An additional factor for many has been the elimination of medical benefits fort early retirees. Many large corporations have ended such benefit programs in the past decade.

Availability of health insurance and value of assets have fluctuated greatly over the past few decades. As a result, the retirement decisions made by older workers have changed. Research which assumes a constant labor force participation of older workers over time will be flawed.

 
At 5/08/2012 6:34 PM, Blogger VangelV said...

Research which assumes a constant labor force participation of older workers over time will be flawed.

But will be used by the optimists who need a narrative that allows them to deny the reality that is obvious to anyone willing to see.

 
At 11/27/2012 2:03 AM, Blogger Alan said...

The Chicago Fed study concluded that approximately 44% of the decrease (1.2 of 2.7) from 2000-11 was caused by changes in the age distribution and other demographic shifts. From 2008-11, they found that only
one-quarter of the 1.8 percentage point decline in actual LFPR for 16–79 year can be attributed to demographic factors. The study doesn’t discuss the accuracy of their model for year 2008, which looks like it’s very close to the actual LFPR on their graph. This means that their model, which uses only demographic shifts, almost completely explained the drop from 2000-2008, and that the sharp drop in LFPR from 2008-11 is mostly the result of the Great Recession.

 
At 12/01/2012 11:22 AM, Blogger VangelV said...

The Chicago Fed study concluded that approximately 44% of the decrease (1.2 of 2.7) from 2000-11 was caused by changes in the age distribution and other demographic shifts. From 2008-11, they found that only
one-quarter of the 1.8 percentage point decline in actual LFPR for 16–79 year can be attributed to demographic factors. The study doesn’t discuss the accuracy of their model for year 2008, which looks like it’s very close to the actual LFPR on their graph. This means that their model, which uses only demographic shifts, almost completely explained the drop from 2000-2008, and that the sharp drop in LFPR from 2008-11 is mostly the result of the Great Recession.


The Fed models missed the housing bubble. Can we stop pretending once and for all that the Fed is competent?

 

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