Sunday, January 12, 2014

Declining Work Force Participation - Good or Bad?

I have seen lots of news and commentary about the fact that labor force participation has been declining, and they all assume without thinking about it that it is a bad thing, a result of unemployed workers getting discouraged by the recession and giving up on finding new jobs.  
Yet the labor force participation rate is still relatively high in historic terms, as we can see in the following graph:
The real question is whether people are leaving the labor force because they cannot find jobs or are leaving voluntarily. A very short article buried in the business section of the New York Times was the first place that I saw news about this key question:
People keep leaving the labor force. The share of Americans either working or looking for work sank to 62.8 percent in December, tying October for the lowest level since 1977 – an era when women were much less likely to work.
One explanation is that baby boomers are shuffling into retirement. The trend is demographic rather than economic. People are not working because they are old.
Another explanation is that people have abandoned hope of finding jobs.
Both explanations are true for some people. What we don’t know are the proportions. We don’t know how many of the people who have stopped looking for work might want to return to the ranks of working adults as the economy rebounds.
… Why are answers so hard to find? In part because the data is subject to multiple interpretations. Those who say they’ve retired may mean that they never want to work again, or they may be taking shelter in the dignity of retirement because they can’t find work
… A sobering piece of economic modeling by the St. Louis firm Macroeconomic Advisers, published last summer, concluded that the participation rate was not likely to rebound because the damage done by the recession would not be reversed quickly enough to keep ahead of the long-term demographic trends.
It turns out that economists don't know whether most people are leaving the work force voluntarily or because of unemployment, and the pundits are just assuming that less work must be a bad thing.

Is this "sobering" news really as bad as they say?  Obviously, it is better if people can afford to retire rather than having to work until they drop.

Since labor force participation has declined to the level to the level of 1977, it still has a way to go before it reaches the level of the 1950s and 1960s - which were prosperous times economically. The Bureau of Labor Statistics projects that "overall labor force participation rate is expected to decrease from 63.7 percent in 2012 to 61.6 percent in 2022" primarily  because of the aging of the population.  That is above the 58% to 60% that was typical in the 1950s and 1960s.

Even with lower workforce participation, it should be much easier than it was back then for the workers to support everyone, because the average worker produces more than twice as much per hour now as in the 1950s or 1960s.  The only problem is that average people are not getting a fair share of increased productivity, as we saw in the last post, because of growing inequality.

The elderly man who sells newspapers at my transit station recently told me that he plans to retire in 25 years, when he is exactly 100 years old.   I guess the pundits would say that it is good news that he is still selling papers at 75 and can't afford to retire, because it gives us a higher rate of labor force participation.  

BLS projection from


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