Monday, January 11, 2010

Is Labor Force Shrinkage Really Bad?

Much has been made about last months .3% drop in the Labor Participation rate and the 843,000 additional people added to those "not in the labor force". The assumption is that this is bad for our economy and yet another sign of the continued economic doom that is upon us. I believe that the drop in the labor force may not be entirely bad and much of it may be a readjustment to our modern economy/reality than something we are going to have to make up once the economic recovery gains steam (whenever that is).

First, an article from Bloomberg details that:
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.

This makes sense and shows us how we can explain away 2.5 million of the 3.4 million person rise in those not in the labor force since December of 2008. You see the BLS shows us that:
The sum of the employed and the unemployed constitutes the civilian labor force. Persons not in the labor force combined with those in the civilian labor force constitute the civilian noninstitutional population 16 years and over. (There is no upper age limit.)

There is in fact no upper age limit to the household survey and thus retirees are counted as "not in the labor force". It is no wonder this number has been rising and the participation rate has been shrinking, as the boomers are just now getting to an age where they have the ability to retire. So, as this graph shows

Just as the boomers (and women) entering the workforce increased the participation rate from the 70's to the 90's, it is quite likely (and expected) that the boomers retiring will also cause the participation rate to decline sharply going forward.

The "Great Recession" has likely (as referenced by the Bloomberg article above) caused many boomers that lost jobs to take an early retirement (I know several who did this personally) and thus they drop from members of the labor force, to those not in the labor force. This also explains why the number of those not in the labor force who want a job only increased by 800,000 last year while the not in the labor force number was up by 3.4 million. Notice how when we subtract the 2.57 million retirees from the 3.4 million who left the labor force, we end up with almost exactly the 800,000 increase in those not in the labor force who want a job? (the data for these calculations came from the December Jobs Report )

So, what we have going on here appears to be a mass (forced) early retirement exodus that is going on in the US that also coincides with the beginning of the much anticipated baby boomer exodus from the work place. This trend is something that is likely to continue even after the economy recovers, which in theory should a)potentially enable faster reductions in the unemployment rate once job growth begins and b)blunt the impact of future efficiency gains, as retirements may be able to cover job losses.

Just to conclude, what we have here is not some conspiracy theory of people "vanishing" from the labor force, but a large move to early retirement by boomers (albeit pressured by the recession).