Monday, January 11, 2010

Is the Drop in the Not In the Labor Force Number Really the Beginning of the Baby Boomer Rertirement Wave?

Silver Oz has posted a very thought-provoking piece on the "not in the workforce" issue currently embroiling some in the economic blogsphere. I'm going to add onto that with an explanation of what "not in the labor force" means. This will lead to two conclusions. First, many people don't know what the statistics mean. Secondly , is also appears that a large number of people are choosing to leave the workforce, indicating we are possibly witnessing the beginning of the baby boomer retirements.

Let's start with the broadest measure of the workforce:

Labor force measures are based on the civilian noninstitutional population 16 years old and over. Excluded are persons under 16 years of age, all persons confined to institutions such as nursing homes and prisons, and persons on active duty in the Armed Forces. As mentioned previously, the labor force is made up of the employed and the unemployed. The remainder—those who have no job and are not looking for one—are counted as "not in the labor force." Many who are not in the labor force are going to school or are retired. Family responsibilities keep others out of the labor force.

So, we have three groups of people: employed, unemployed and not in the labor force. If you go to table A-1 on the latest BLS release and look at the top area you will see all of these areas:

Click for a larger image.

Now, take out your calculator for a minute. Note that civilian labor force = the total number of employed and unemployed. Then notice that the civilian labor force and the not in the labor force = the civilian non-institutional population.

For the BLS, an employed person is:

Persons 16 years and over in the civilian noninstitutional population who, during the reference week, (a) did any work at all (at least 1 hour) as paid employees; worked in their own business, profession, or on their own farm, or worked 15 hours or more as unpaid workers in an enterprise operated by a member of the family; and (b) all those who were not working but who had jobs or businesses from which they were temporarily absent because of vacation, illness, bad weather, childcare problems, maternity or paternity leave, labor-management dispute, job training, or other family or personal reasons, whether or not they were paid for the time off or were seeking other jobs. Each employed person is counted only once, even if he or she holds more than one job. Excluded are persons whose only activity consisted of work around their own house (painting, repairing, or own home housework) or volunteer work for religious, charitable, and other organizations.

While an unemployed person is:

Persons aged 16 years and older who had no employment during the reference week, were available for work, except for temporary illness, and had made specific efforts to find employment sometime during the 4-week period ending with the reference week. Persons who were waiting to be recalled to a job from which they had been laid off need not have been looking for work to be classified as unemployed.

With me so far? Good. The real issue is what does "not in the labor force" mean -- because that is what is causing all the controversy. Let's look in a bit more detail about what "not in the labor force" means:

A series of questions is asked each month of persons not in the labor force to obtain information about their desire for work, the reasons why they had not looked for work in the last 4 weeks, their prior job search, and their availability for work. These questions include:

1. Do you currently want a job, either full or part time?
2. What is the main reason you were not looking for work during the LAST 4 WEEKS?
3. Did you look for work at any time during the last 12 months?
4. LAST WEEK, could you have started a job if one had been offered?

These questions form the basis for estimating the number of persons who are not in the labor force but who are considered to be "marginally attached to the labor force." These are persons without jobs who are not currently looking for work (and therefore are not counted as unemployed), but who nevertheless have demonstrated some degree of labor force attachment. Specifically, to be counted as "marginally attached to the labor force," individuals must indicate that they currently want a job, have looked for work in the last 12 months (or since they last worked if they worked within the last 12 months), and are available for work. "Discouraged workers" are a subset of the marginally attached. Discouraged workers report they are not currently looking for work for one of four reasons:

1. They believe no job is available to them in their line of work or area.
2. They had previously been unable to find work.
3. They lack the necessary schooling, training, skills, or experience.
4. Employers think they are too young or too old, or they face some other type of discrimination.

Additional questions about persons not in the labor force are asked during each household's last month of its 4-month tenure in the sample rotation pattern. These questions are designed to collect information about why these people left their previous jobs, when they last worked at a job or business, and whether they intend to look for work in the near future.

The central issue with the "Not in the Labor Force" definition is the BLS wants to figure out if someone is really not in the work force or if they want to work but for some reason can't find a job. Here is a table from the monthly unemployment report (table A13) that shows the "not in the labor force" number and its various sub-parts:

Click for a larger image.

Now -- let's do some basic math. In December the seasonally adjusted "not in the labor force" number was 83,865,000 while the "persons who currently want a job" were 6,306,000 or about 7.5% of the "not in the labor force number." This percentage was 6.8% a year ago. So the number has increased, but is still an incredibly small percentage of the "not in the labor force number." In other words, the "not in the labor force" number is composed primarily (as in over 90%) of people who don't want to work. What this means is that last month people did not disappear into some statistical black hole -- they in fact decided to leave the work force. And we know this because 7.5% of the people who "aren't in the work force" want a job. Also remember the definition above of "not in the work force:"

Many who are not in the labor force are going to school or are retired. Family responsibilities keep others out of the labor force.

So -- some people have decided to go back to school -- which is a good thing. And some people have decided to retire -- also a good thing. And some have decided to help with their family -- also a good thing.

Now -- go back to table A-1. From November to December, the "not in the labor force" number increased 843,000. However, over the same time period the "Persons who currently want a job" -- a subset of the "not in the labor force" statistic -- only increased by 263,000. That means 580,000 left the work force but don't want a job. From the definition above, these people could have retired, gone back to school or helped out with family matters. But the point is that about 68% of the people who left the work force last month don't want a job. Again note there is no conspiracy to send people in a giant meat grinder a la Pink Floyd. People made a decision to leave the work force.

As Silver Oz notes, over the last 12 months the "not in the labor force" number has increased by 3.4 million but the "persons who want a job" number has only increased 795,000. Put another way, 2.6 million people have left the work force but don't want a job. That's something that has been completely lost in the "debate" about this number. Additionally, we have seen a large increase in the number of people applying for social security benefits:

Applications for Social Security benefits rose almost 50 percent more than expected this year because of the recession, according to the federal retirement program.

“We are seeing a significant increase in both retirement and disability applications as a result of the recession,” said Mark Lassiter, a Social Security spokesman.

The 150,000 extra retirees may add to the financial pressure on the entitlement program. In May, Social Security trustees said expenses would exceed revenue beginning in 2016, one year earlier than their previous forecast.


The Social Security Administration had projected an increase of 315,000 applicants for the 12 months ending Sept. 30 partly because the first baby boomers -- those born right after World War II -- are starting to retire.

The actual increase was higher. Agency statistics show that 2.57 million people requested benefits, up from the 2.10 million applications received during the previous 12 months. That’s an increase of 465,000, or 47 percent higher than the expected rise.

All of this tells us the the US labor force is shrinking which is born out by this chart of the labor force participation ratio:

Remember that the US employment population is broken down into various subsets. The biggest group is the civilian non-institutional population -- which is the practically everybody in the country over 16 YO. Then there is the civilian labor force which is all the people who are employed + all the people who are unemployed. To get the labor force participation rate we divide the civilian labor force (all employed and unemployed people) by the total number of people who could be working (the civilian non-institutional population). Notice that this number started to steadily increase from about 60% in the early 1970s to 66%-67% in the early 1990s. Then the number leveled off. Now we are seeing that number decrease. Also note we are just starting to see the beginning of the baby boomer retirements. That means that since the early 1970s we have seen the expansion of the number of people who were working (the baby boomers going to work) and now we are seeing the beginning of the baby boomer's retirement.

Let's add one more element to the mix:

The chart above is the employment to population ratio. Remember the groups from Table A1? This is the total number of employed people divided by the civilian non-institutional population. Here's what is interesting about this chart. There are two areas -- the first from 1945 to 1975 and the second from 1990 to 2010. In the first section the employment/population ration fluctuated between 55% and 58%. In the second area we see the numbers fluctuate between 61% - 64%. In other words, the US economy has gotten used to a larger percentage of the population working. But -- as the baby boomers retire that number will probably drop down. Finally, notice that the chart is approaching the percentages we saw before the baby boomers entered the work force.

So to conclude:

1.) People have not "disappeared from the labor force." In fact, a proper reading of the statistics (and what they mean and measure) indicates a large number of people have voluntarily left the labor force.

2.) The participation rate -- the percentage of employed and unemployed people relative to almost the total US population -- began increasing in the 1970s and has recently started to decrease. This corresponds with the baby boomers entering the workforce and the beginning of the baby boomer's retirement.

3.) The percentage of the population that is working is also decreasing. But that might also be due to the beginning of the baby boomer's retirement.