Nums: More folks saying: “Why work?”

It’s not new news that the Labor Force Participation Rate has been falling .

What struck me in March’s  employment stats was that the LFPR is still dropping

LFPR - March 2015

Many economists  say it’s simply demographics — it’s old folks retiring.

Partially true, but certainly not the whole story.

 

Business Insider reports that …

Bank of America economist Michelle Mayer has put out a note on one of the more controversial subjects in economics these days: the Labor Force Participation Rate.

The Unemployment Rate has been grinding down, but everyone has noticed that Labor Force Participation has dropped as well, and it’s been argued that the exodus of people from the workforce (who no longer count as unemployed when they’re not working) undermine the idea of workforce improvement.

BI – repping for Team O — takes delight observing that: “Mayer’s note comes down firmly on the side of saying that the decline in Labor Force Participation is largely secular, and not primarily about the economic malaise.

 

image

 

Hold your pants on, BI.

Here’s how & why Mayer’s analysis overstates the secular impact and understates the economic impact.

 

Mayer’s Methodology

The effect of demographics on the LFPR can be isolated by looking at the participation rates by age cohort.

The aggregate LFPR is equal to the summation of each individual age cohort’s LFPR weighted by its share of the population.

So, the impact of the change in population can be determined by fixing the LFPR for each age cohort at pre-recession levels.

The analysis suggests that half of the 2.7pp decline in the LFPR since the onset of the recession can be explained simply from the aging population.

In other words, holding all else equal – meaning no business cycle dynamics – the LFPR would be at 64.6% today compared to the actual rate of 63.3%.

The remaining 1.4pp drop is due to some combination of secular and short-term cyclical factors.

OK, that’s pretty standard methodology, but …

Mayer makes a very key simplifying assumption …  that the LFPR is relatively constant within demographic groups.

But, it isn’t..

A couple of weeks ago, The Atlantic published an interesting recap of LFPRs by age group over time.

 

image

 

Note that the LFPR has been declining for younger age groups and increasing for older age groups.

So what?

A couple of weeks ago, reacting to the Administration’s shills pumping that the decline in the LFPR is simply demographics.we did an analysis to isolate the impacts of demographics and economics.  See Nums: Still, blaming the declining LFPR on seniors retiring … for details.

In summary, about 1/3 of the LFPR is due to an aging population … 2/3s to the state of the economy.

image

 

Bottom line: the difference between 1/3 and 1/2 may seem like hair-splitting  and, it probably is unless you’re trying to do a victory dance on the state of the economy.

* * * * *
Follow on Twitter @KenHoma                         >> Latest Posts

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s