February 18, 2012


A look at the following chart and this CBO report:

The baby boom generation (those born between 1946 and 1964) are expected to have a significant affect on the participation rate in the decades to come.

“During the decades to come, one such development is expected to be a slower rate of growth of the labor force relative to the average growth rate of the past few decades. That slowdown is anticipated to occur primarily because of the aging and retirement of large numbers of baby boomers and because women’s participation in the labor force has leveled off since the late 1990s after having risen substantially throughout the three decades before that.”
However, they are not a large impact right now, for even the oldest of the baby boom generation are just reaching retirement age. The average is at the peak of their careers, in their mid/late 50’s. Those that are retiring early could be 1) well off and able to 2) given early retirement packages due to the bad economy as my company has done or 3) lost their job and on benefits that will permanently move them out of the job market. The poor economy is certainly a driving factor of our current depressed labor participation rate:

“The downward trend since 2000 can be attributed largely to the aging and retirement of the baby boomers. It also reflects a leveling off in participation among women between the ages of 25 and 54—who are no longer participating at higher rates than their predecessors did at the same age—and a pronounced decline in participation among people under 25. Participation has fallen even further since mid-2008, as a lack of job opportunities has caused many people to withdraw from or to remain out of the labor force.”
So how do we know how much? Is the current drop in the labor force just demographics or the economy or other factors? The CBO tries to answer that:

“The effect of demographics on the overall participation rate can be calculated by holding group-specific participation constant at 2007 (prerecession) rates but allowing population shares to adjust in line with CBO’s projections. CBO estimates that the demographic effect has already reduced the overall rate of participation by about 0.5 percentage points since 2007”
So, the aging baby boomers and other demographic affects have reduced the participation rate by 0.5% from 2007. The participation rate has dropped by 2.2% from that time. That is 1.7% or 5.3 million people that left the job market for economic or other reasons.
So is the economy bad and causing people to stop looking for work, or it is roaring back due to Obama’s policies and he just needs more time? The CBO has more to say.

“Two factors are especially important to the current projections of participation in the labor force. The first is near-term economic conditions. Because of the weakened state of the economy, the labor force is currently well below its potential size.”

“In late 2010, the unemployment rate averaged 9.6 percent, more than 4 percentage points above CBO’s estimate of the long-term natural rate. Accordingly, labor force participation has fallen significantly below its trend rate, as some workers (especially men between the ages of 25 and 54) have withdrawn from the labor force in the face of a poor job market and others (especially teens) have refrained from entering. By the final quarter of 2010, the actual labor force participation rate—64.4 percent—was more than a full percentage point below the potential participation rate as estimated by CBO. It also was lower than what would have been expected on the basis of the historical relationship between the labor force participation rate and the unemployment rate.”

“On balance, the recession has a modest downward influence on the participation rate projected for the 2016–2021 period, principally because some men in their 50s who have become unemployed or have left the labor force as a consequence of the recession are not expected to return to the labor force.”

“CBO’s labor force projections reflect the influence of public policies, especially those that involve taxes on labor or that directly affect the incentive to work in some other way”… “CBO estimates that scheduled changes in policies relative to the policies that were in effect in 2010 will reduce the labor force participation rate in 2021 by about 0.9 percentage points, thus reducing the size of the labor force by slightly more than 2 million people.”…“Specifically, changes in the tax code that are scheduled under current law will increase marginal tax rates on labor income (the tax rates applied to the last dollar earned) during the coming decade and, in CBO’s estimation, reduce labor force participation.”

I am certainly not blaming Obama for all our problems. But if he is going to run around trumpeting a drop in U3 unemployment as proof that is policies are working. We should at least look at how much those policies are costing, what is happening to the labor force and are there other factors involved. That is what I am trying to do. Of course my chart is biased, and zoomed in to the most convenient scale factors, and only puts selected information on it. All data can be manipulated to say what you want. I just wish more people were as critical of the “official” data as they are of those on the opposite political aisle.

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