04.05.2016 1

Solving the labor participation puzzle

By Robert RomanoCrowdPeople

Since 2000 labor force participation in the U.S. — that is, the percent of people working or looking for work — which has been dropping almost every single year, from an unadjusted average annual 67.07 percent in 2000 to 62.65 percent in 2015.

The question over that period is whether the drop in participation is benign owing to certain factors, such as the aging workforce, or if it underscores any fundamental weakening of the U.S. economy.

The answer appears to be a little bit of both.

Yes, demographics do explain a lot of the drop in labor participation — but not all of it.

An Americans for Limited Government analysis of the latest annual figures by the Bureau of Labor Statistics charts contributions to non-participation, that is those leaving the labor force on a net basis.

The analysis does find that those 65 years old and older did account for 1.32 percentage points of the 4.42 percentage points drop in the overall participation rate.

So, seniors retiring does appear to constitute about 29.9 percent of the overall drop.

On the other hand, the rest of it fell on the working age population. 16 to 24 year olds accounted for 1.42 percentage points of the drop (32.1 percent), 25 to 54 year olds 0.49 percentage points of the drop (11.09 percent), and 55 to 64 year olds 1.2 percent points of the drop (27.15 percent).

This accounts for about 9.4 million Americans aged 16 to 64 — those in the prime working years of their lives — who either left the labor force or never entered on a net basis.

Still, part of the reason here could again be demographic, particularly for younger Americans who are going to college in greater numbers and for longer periods of time. But take that with a grain of salt. It only accounts for 4.2 million of the 9.4 million, and we still have not seen what the impacts that delayed entry into the labor force might have on lifetime earning potential or the ability to hold down work long-term.

The rest are aged 25 to 54, representing another 3.98 million, and 55 to 64, representing another 1.2 million. And for 55 to 64 year olds, like seniors, that comes with older Americans actually working longer on a percentage basis as retirement savings have not met up with expectations after the financial crisis of 2008 and 2009. That is to say, if older Americans had retired at the same rate they did just 15 years ago, the labor participation rate would be even lower.

So, there’s a lot going on here. But to say recent trends in labor participation are singularly demographic would not tell the whole story. Even for Americans in prime working years, there are millions fewer working or looking for work.

Probably because there is less work to be found, with economic growth slowing down considerably since 2000. The Gross Domestic Product has not grown above 4 percent since 2000, and not above 3 percent since 2005, leading to less job creation.

Paradoxically, particularly with fewer young Americans entering the labor force, labor shortages have almost never been higher with 5.5 million job openings according to data compiled by the Bureau of Labor Statistics.

Meaning, there may actually be too many people going to college to meet even the relatively lower demand for labor in the slowing economy. If that keeps up, you could see an overall contraction of the labor force as jobs once performed by many Baby Boomers will simply not be replaced and go away.

So, while the demographics of an aging workforce do explain a lot of the decline of the U.S. labor force, the fact that those aging workers are not necessarily being replaced by younger ones could mean more labor dislocation is yet to come when those jobs simply cease existing. And that won’t be a good thing, particularly with the already slow-growing economy.

In the final analysis, if we want the economy to start growing robustly again, America needs to get back to work.

Robert Romano is the senior editor of Americans for Limited Government.

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