LFPR and the New Macroeconomics

The civilian labor force participation rate (LFPR) tells the percentage of the population that wants to work. That is, it counts those with jobs and adds those who are looking for jobs and relates that number to the size of the population. Not everyone wants to be in the labor force -- some are too young or too old. Some are busy getting education. Some are sick. Some don't want to work for a variety of reasons. So LFPR is never close to 100%. 

US LFPR generally increased after World War II until early 2001 after it reached a little more than 67% of the population. Since then it has been falling and was recorded as 62.7% in May 2017. This roughly 4% decline is meaningful -- 4% of the US population of 230 million people is about 9 million people who no longer participate in the labor force. To put that number of 9 million in perspective – that’s about how many people work in manufacturing. That’s like everyone in New Jersey deciding they would no longer take or look for a job. No New Jersey jokes please. 

This new 16-year trend is important. I am going to argue that it is very important and may constitute the beginning of a new phase of macroeconomics and policy. As I said last week, macro is becoming obsolete. Monetary and fiscal policy are out of bullets. Supply-side policy has political downsides. So what’s left?

The answer might reside in the LFPR. Today’s experts repeat over and over that the lackluster economic growth predicted for the future is caused by lack of business spending on capital and a reluctance of people to join the labor force. One could go further and say that the former is related to the latter – firms are pessimistic and won’t invest more because they see LFPR as a major problem and do not see a government that is doing anything about current economic challenges.

Future macroeconomic theory and policy, therefore, should be focused on LFPR. I have mused in this blog in the past that if labor is not forthcoming and if the labor that does come is not prepared for the jobs of the future, then maybe we should focus on that mismatch. In macro we usually take that mismatch as secondary and hope it will be solved by national economic growth induced from traditional monetary and fiscal policies. But that puts the cart before the horse. Maybe today we need to focus on labor mismatch and if we solve that then maybe economic growth will improve in the process.

This post today is a humble beginning in this direction, and my only goal is to shed some light on the data. Today I look at some of the data as it relates to the LFPR. I got the data from the FRED service at the St. Louis Federal Reserve Bank. I look at data from 2002 to 2017. The goal is to better understand or break down the above-mentioned roughly 4% decline in labor participation in the USA.

Consider first, men versus women. The table below shows that LFPR for both men and women fell between 2002 and 2017 – but it fell more for men – falling almost twice as much.

                        Women    Men   Gender Gap

2002                 59.6          73.9    14.3

2017                 57.0          69.0    12.0

Change             -2.6          -4.9    

Next, look at age. In 2002 almost 84% of those in the prime work ages (25-54) looked for and/or found work. Younger people worked too – 76% was the LFPR for those aged 16-24. Those 55 years or older had a much lower rate at 34%. The changes in the next 25 years are interesting. For the regular working ages the LFPR went down by only 2%. Those at the younger end found participation rates falling by at least twice as much as their seniors. As for the older folks, they are participating dramatically more – an increase of almost 6% in their LFPR!

                        25-54    55+  16-19 20-24

2002                83.7      34.2    76.7   75.4

2017                81.7      39.9    71.9   70.4

Change            -2.0      +5.7    -4.8    -5.0

Finally I look at education. The first column looks at high school graduates 25 years and older; the second is college graduates 25 years and older. The impacts of college education on LFPR are dramatic. While college-educated people did participate somewhat less in 2017, the change for high school grads was much larger – almost five times as large.

                        High School              College

2002                          64.4                75.4

2017                          58.0                74.0

Change                      -6.4                 -1.4

This excursion through some data is meant to be a first step in looking deeper into a major macroeconomic challenge. Surely this is not enough data to form solid conclusions. Curious minds would wonder about other and finer breakdowns as they relate to education, training, age, race, location, industry, and more.

What is going on in the last 16 years? This data suggests that the largest groups to explain a slowdown in labor participation are young males with less education. Surprisingly, older people who should be enjoying time on Alaskan cruises sipping JD seem to be increasing their participation.

A scientific friend of mine said that most good science starts with data and ends with understanding. Labor force participation data needs to be better understood. Then perhaps we will know WHY participation is flagging and perhaps what we can do about it. Let's get back to work!