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!

Where Have All The Workers Gone? By Guest Blogger Buck Klemkosky

In June 2015, employers added 223,000 jobs and the unemployment rate fell from 5.5% to 5.3% – the lowest rate since April 2008. In July, employers added another 215,000 jobs, but the unemployment rate stayed at 5.3%. Why would adding about the same number of jobs lower the unemployment in June but not July? The primary reason was that 432,000 people dropped out of the labor force in June and a much smaller number in July.

One of the unexplained phenomena of the six-year economic recovery and expansion has been millions of people dropping out of the labor force. The Bureau of Labor Statistics (BLS) has been tracking the labor-force participation rate since 1975. BLS tracks the number of workers eligible to work, including all those 16 years and older who are not in the military and not institutionalized, mostly those in jail or prisons. In July, the BLS reported that 93.8 million Americans were not in the labor force or wanting to be in the labor force as the participation rate was at 62.6%, a 38-year low. There were 58.6 million Americans not in the labor force in 1975 when the BLS began keeping records, 80 million in 2008, 90 million in July 2013 and 93.8 million today.

It is estimated there are 250.9 million in the civilian population 16 years and older, not in the military or in institutions. Of those, 157.1 million participated in the labor force by either holding a job or actively seeking one, of which 148.7 million were employed. This is how the labor participation rate of 62.6% is calculated. At the end of 2007, the participation rate was 67%. If the participation rate was still 67% , there would be 168 million Americans working or seeing work – about 11 million more than today. The question is why aren’t those 11 million working or seeking work?

Part of the question may seem obvious; people are retiring, especially the Baby Boomers, the 75 million born between 1946 and 1964. Every day, about 10,000 Baby Boomers turn 65. While the absolute number of Americans over 65 who have retired has increased, the labor-force participation rate of those 65 or older has actually increased. The participation rate for those ages 55-64 has also increased, driven almost exclusively by the increased labor-force participation of women. Those retiring after age 55 can account for 2-3 million of the 11 million missing workers.

Another logical explanation of the lower labor-force participation rate is the larger number of those aged 16-25 who are in college or training programs. This is part of the Generation Y or Millennial Generation, those born between 1980 and 2000, which is larger in absolute numbers than the Baby Boomers. According to the Organization for Economic Cooperation and Development (OECD), the percentage of the U.S. population in that age group not in education, training or employed has increased from 12% in 2007 to 15% at the end of 2014. So there are more than 1 million younger people who are not working, seeking work or getting an education. They are discouraged about job prospects and have dropped out of the labor force.

The prime working age is 25-54 and that is the core of the U.S. workforce. In July, 77.1% of this group was employed, better than the 75% employed at the bottom of the labor force in 2010. However, it is still 2.8% lower than the 79.9% prime-age employment rate of December 2007. While the Great Recession was harder on prime-age men than women, the recovery rate was better for men than women. Still there are 3% fewer prime-age males working today than in December 2007 and 2.2% fewer prime-age women. While many in the age group are undoubtedly also seeking employment if not working, it appears that this may be more structural than cyclical. In 2000 the employment rate for workers aged 25-54 was 81.6% up from 72.5% in 1982, but has since fallen to 77.1%, so there are several million Americans in the prime working age of 25-54 not working or seeking work.

If college and retirement can’t explain the millions of workers who have dropped out of the labor force, what can? Government programs and incentives can explain part of the missing workers. There are 11 million people in the U.S. who receive Social Security disability benefits today versus 5 million in 2000. While not all of these people are of prime working age, the majority are, so this accounts for many of the workers missing from the labor force. Other programs such as the Affordable Care Act also have provided disincentives to work as insurance is now available to those not working or seeking work. Food stamp recipients are also at an all-time high, 30 million more than in 2000, and some of the missing workers may be subsisting on this entitlement program.

The U.S. was supposed to become a cashless society. But the amount of cash in the U.S. economy has grown to $1.4 trillion today, 2.6 times the amount of cash in the economy in 2000. Cash has grown much faster than either GDP or the population. This suggests a growing underground economy that has evolved to be worth an estimated $2 trillion. Given 120 million households in the U.S., this underground economy works out to more than $16,000 per household. Many workers exist in this $2 trillion cash-based economy and avoid taxation, government regulations or being accounted for in the labor force.

Education, retirement and disability can account for about half of the 11 million potential workers. The other half are missing in action. If not, the unemployment rate would be higher than 5.3%. Adding just part-time workers who want to work full time to the unemployed takes the rate, known as U6, to 10.4%. Adding those who have dropped out of the labor force would take the unemployment rate much higher.

This missing workers phenomenon seems to be basically a U.S. issue. Since 2000, America’s labor-force participation rate has declined more than in any other developed country, even though the U.S. economy has fared better. And the U.S. is one of only three countries out of 38 developed countries with a declining labor-force participation rate. In the longer term it is important to get the participation rate up because growth of real GDP is a function of growth in number of workers and growth in real output per worker. For the decade 2005-2014, the annual growth of the working-age population, 16-64, was only 0.7%. This was one of  the reasons for the subpar economic growth of 1.8% annually in that decade. The BLS forecasts the growth of the working-age population to be 0.4% annually in the 2015-2024 decade. Getting the missing workers back into the economy is essential for U.S. long-term economic growth. If a declining work force is not enough of a problem, productivity growth per worker as well as wage growth are also at multi-year lows. But that is another story.