Tuesday, May 19, 2015

Revisiting Labor Force Participation

Tyler Cowen, linked to a post today about unemployment, which made the common insinuation that the unemployment rate has been lowered by a bipartisan conspiracy to hide the true level of unemployment.  From the post:
Before the latest recession, the proportion of people who "want a job" has been around 63% for a very long time. During the recession, this proportion plunged to below 59%.
This looks plausible next to a graph truncated in 1994 when female labor force participation was peaking and falling into a slight long term declining trend similar to male labor force participation in a post that makes no reference to these gender trends or to the significant aging issue.  But, the idea that the aggregate Employment-Population Ratio (EPR) has had some longstanding level stationarity which has suddenly failed is false.  Labor force participation (LFP = employed + unemployed, so it is less cyclical than EPR) does have longstanding linear trends for gender specific age groups.  But those trends have been slightly negative for generations among males.  So, where there are trends, they don't support the author's case.

Anyway, looking at that made me realize that it had been quite a while since I had reviewed Labor Force Participation (LFP).  We will continue to slowly converge on the long term trend, so it's not something I have been following recently, but it might be interesting to unpack it a bit to see what's been happening lately.  (My LFP label has many posts.  Here is a reaction to a previous Tyler Cowen link.  Here, I go into some more detail regarding errors in LFP analysis.)

Here is a graph of the aggregate LFP rate compared to a demographically adjusted trend.  I am surprised to see that the trend has begun to level off and that there has not been convergence between my demographically adjusted trend and actual LFP.  I had blamed the declining LFP on cyclical declines, demographics, and on the minimum wage hikes of 2007-2009, with a mitigating factor from Emergency Unemployment Insurance (EUI), since that should have been keeping some unemployed workers, who might otherwise leave the labor force, in the labor force.  There was about a 1/2% drop in LFP coincident with the end of EUI.  (This graph has a wide scale, but you can see the widening of the gap between actual LFP and trend LFP in 2014.)  But, I would have expected LFP to be recovering by that time from the cyclical and minimum wage issues.

So, the question is, why isn't there a stronger recovery in LFP?

As a first step, let's revisit the movement of LFP among the various age groups.  The 16-24 group is a bit of a wild card, because there has been significant movement over time.  I would attribute some of the 2007-2009 decline and subsequent recovery to the minimum wage hikes, but there has been a strong downtrend in this age group for many years related to trends in extended education.

The idea that 16-24 year old labor force participation is back to trend or slightly above appears to be reasonable, because 16-24 unemployment is also back to recovery levels.  Unemployment tends to be high in this group.  In April it was at 11.6%, which was the unemployment level in 1997 and 2005 when labor force participation was previously above trend.

So, the continued gap between actual LFP and my estimated trend is not coming from this age group.

Next, let's look at prime working ages.  The 25-34 group is 0.3% below trend, 35-44 is 0.8% below trend, and 45-54 is 1.3% below trend.  The gap widens as we move up through age groups.

I think the 25-44 group is straightforward.  The combined level of these two groups suggests a gap between LFP and trend LFP of around 0.5%, which, is slightly low, but not unusual for late recovery periods.

Moving on to the 55+ group, there has been a tremendous break from trend.  This group is 3.1% below trend, and the break happened around 2007-2009, which appears to be related to the cycle.

But, the 45+ age groups are a little strange.  The 55+ age groups have had sharply rising LFP trends for the past 20 years.  Part of this is due to rising LFP among men, which appears to be a cultural shift among baby boomers to work longer, unrelated to business cycles.

Part of this is due to the last remaining upward shift in female labor participation.  Female LFP for 35-44 year olds peaked in the 1990s.  It peaked for 45-54 year olds around 2000-2002.  And, we see here that it peaked for 55+ year olds in 2010-2012.

So, the leveling trend of 55+ female LFP was predictable.  So, both the leveling female trend and the recession happened at the same time that the trend of 55+ male LFP leveled.

It's hard to pin down the precise causes of the movements in this age group without much more detailed analysis.  But, the systematic behavior by gender and age, and the sharp differences between the marginal age groups and the core prime age groups, suggests to me that these changes are only tangential to the business cycle.

Here is a graph with the 55+ age groups broken out into 5 year subgroups.  This graph shows the change in labor force participation, in percentage points, from January 2000.  I think here we can see that there isn't a systematic kink in labor force behavior associated with the recession.  What we see is a peak in labor force participation that moves through the age groups roughly in line with the arrival of the baby boomers, who tend to work to older ages and tend to have higher female participation.  These tend to be very noisy data series.  But, generally, the 55-59 group peaked around the time of the recession (and some of this group's decline may be cyclical).  The older groups are still growing as life expectancy grows and as the baby boomers move into the older groups.

So, what is happening to the LFP of the aggregated 55+ group is a similar version of what is happening to the aggregate LFP across all ages.  The trends within each subgroup are continuing with a relatively normal behavior.  In these groups, the trends are actually rising.  But, as the baby boomers age through these groups, the total LFP of the aggregate 55+ group declines, because LFP declines sharply as workers age through these groups.  This is shown in the next graph.

And, this basic demographic issue also explains the behavior of the 45-54 group.  Here is that group, shown with the 5 year subgroups.  The 45-49 subgroup looks more like the 25-44 age groups.  And the 50-54 subgroup looks more like the 55-59 group.

Stepping back, the only significant factor here that looks especially out of the ordinary when we disaggregate, is the sharp dip in LFP for the 50-59 age range, which is probably explained by the rise in social security disability claims that tends to happen in this age range, and has especially been the case during the recent recession.

If this change in the trend of 55+ workers is not related to the recession, then there is no gap in LFP.  The next graph shows 55+ LFP and my original linear trend, with a new trend line added that follows the new flat trend since the beginning of 2011.

And the graph after that shows what the aggregate LFP trend looks like if we make this change in the 55+ age group trend.

Now, I haven't proven that there is no cyclical issue here.  But, if someone argues that trend LFP is some distance above the estimated trend that I show here, they would need to explain why the continued lag in LFP is limited to workers over 50 years old.

In the period from 2000 to 2014, social security disability rolls have increased from 2.4% to 3.6% of the adult civilian population.  New enrollees peaked in 2010, which is when baby boomers were at the heart of the 50-60 age group.  Disability rolls have stabilized since 2011, as baby boomers move into the 60+ age groups, so this issue is probably not as severe, going forward.  And, while there was some increase in disability enrollment that was related to the recession, this is not really a cyclical issue.  And, it's not a reason to describe the current labor market as deceptively weak.

So, I continue to believe that the labor market is as strong as popular measures make it out to be.  I don't accept the notion that strong labor markets are inflationary.  I think we can expect strong real growth that comes from a highly functional economy.  This would normally also include high real interest rates.  But, I think it remains to be seen if high interest rates can materialize in the absence of mortgage expansion.  So, while I think labor markets are strong, I don't think this necessarily translates into a call for the Fed to raise their target rates.  But, if we can find some way to overcome the real estate shortage, secular growth rates could be quite strong.


  1. elExcellent blogging. And I think you have hit upon the key: that labor force participation rates are not only driven by demographics, but also by taxes and regulations. The explosion of SSDI disability is an example. In Germany in the last 13 years the labor force and participation rate has increased by 10%.

    In conclusion, there is no need to accept economic decline.

    The VA disability system has also exploded, now with 4 million on the rolls.

    1. Benjamin, have you ever seen the interactive Census map here:


      The range of labor force participation by neighborhood and the correlation between that and household incomes is interesting.