Decline in Labor Force Participation Reflects Demographics, May Not Be as Bad as Reported
The data in the top two charts above, courtesy of Zero Hedge (linked at The Drudge Report today with the headline "Labor Force Participation Rate Lowest Since 1981"), have been getting a lot of attention. Here's some recent commentary:1. Tyler Durden at Zero Hedge: "It is just getting sad now. In April the number of people not in the labor force rose by a whopping 522,000 from 87,897,000 to 88,419,000 (see second chart above). This is the highest on record. The flip side, and the reason why the unemployment dropped to 8.1% is that the labor force participation rate just dipped to a new 30-year low of 64.3% (see top chart above). 2. John Merline at IBD: "In April, the labor force was 365,000 smaller than it was in June 2009 — the month the economic recovery officially started. That's in stark contrast to every other post-World War II expansion, which saw the labor force climb by the millions at this point in their recoveries, even as unemployment rates were driven down. Combined with the growing working-age population, this has pushed the labor force participation rate — those working or looking for a job compared with the working-age population — down to 63.6% in April from 65.7% in mid-2009, and the lowest since 1981."3. Wall Street Journal: "The economy turned in another lackluster month for job creation in April, with 115,000 net new jobs, 130,000 in private business (less 15,000 fewer in government). The unemployment rate fell a tick to 8.1%, albeit mainly because the labor force shrank by 342,000. This relates to what is arguably the most troubling trend in the April jobs report, which is the continuing decline in the share of working-age Americans who are in the labor force.The civilian labor participation rate, as it's known, fell again in April to 63.6%. That's the second decline in a row and the lowest rate since December 1981. That's right—more than 30 years ago, longer than Mark Zuckerberg has been alive. The nearby chart shows the disturbing round trip the workforce participation rate has taken since 1980 and the precipitous drop in the last three years." MP: Some comments1. An important point of clarification: The civilian labor force participation rate (LFPR) is calculated by the BLS as the Civilian Labor Force (employed + unemployed) divided by the Civilian Noninstitutional Population, and not by the working age population as both the WSJ and IBD report. This can be verified by the current BLS employment report, which calculates the April Labor Force Participation Rate of 63.6% as 154,365 (labor force) DIVIDED BY 242,784,000 (TOTAL POPULATION, not divided by working-age population).2. One reason that the LFPR can be going down over time is that the civilian population can be increasing relative to the labor force, and that's exactly what has been happening to the Male Labor Force Participation Rate, since at least 1948 (see third chart above). From a post-war high of 87.4% in 1949, the male LFPR has been consistently declining and reached a low of 70% in April. Perhaps the decline accelerated in recent years, and the graph would indicate that's the case, but the decline in male LFPR is part of long-term, secular demographic trend that has been going on for since the 1940s, and has been declining even during all economic expansions since WWII. Reason? Increasing life expectancy over time will lead to increases in the population relative to men in the labor force. 3. As the bottom chart helps illustrate, the dramatic increase in female LFPR from 50% to 60% between 1980 and 2000 more than offset the 2.5% decline in male LFPR during period from 77.5% to 75%, causing the overall LFPR to increase. The female LFPR peaked at 60.3% in 2000, and was starting to decline slightly even during the 2002-2007 expansion, again probably because of increased life expectancy leading to greater increases in population relative to the labor force. 4. The third chart also shows that the "sad trend" since 2007 of those counted as "not in the labor force" referred to by Zero Hedge is really just a continuation of a long-term demographic trend going back to at least 1975 (first year BLS has data available). Again, this probably just a statistical reality resulting from increased life expectancy and an aging population. Bottom Line: The overall LFPR was in decline after peaking in 2000 reflecting long-term demographic trends even during the expansion of 2002-2007, and probably would have continued to decline even without the Great Recession. Although it's certainly likely that the Great Recession accelerated the decline since 2007, it's important to realize with increased life expectancy, we can expect continued increases over time in those counted as "not in the labor force" and a continuation of the decline in the LFPR that started in 2000.