Monday, May 7, 2012

The Incredible Shrinking Labor Force

Exra Klein has a great piece in Saturday's Washington Post on the "Incredible Shrinking Labor Force" where he discusses the implications of the dropping labor participation rate.  He notes that the retirement of the baby boomers is at minimum an important factor in this trend, and at maximum the primary reason for the trend.  This is something we've been talking about for some time (see here, here and here)

Some excerpts are below, but your should really read the whole thing.  Ezra does a great job of explaining the issue.
But a number of economists are arguing that the recession is distracting people from the real story — long-run demographic trends that have nothing to do with the current economy. Baby boomers are starting to retire en masse, which means that there are fewer eligible American workers.

Demographics have always played a big role in the rise and fall of the labor force. Between 1960 and 2000, the labor force in the United States surged from 59 percent to a peak of 67.3 percent. That was largely due to the fact that more women were entering the labor force while improvements in health and information technology allowed Americans to work more years.

But since 2000, the labor force rate has been steadily declining as the baby-boom generation has been retiring. Because of this, the Federal Reserve Bank of Chicago expects the labor force participation rate to be lower in 2020 than it is today, regardless of how well the economy does.

In a March report titled “Dispelling an Urban Legend,” Dean Maki, an economist at Barclays Capital, found that demographics accounted for a majority of the drop in the participation rate since 2002.

A smaller workforce means less growth

And what about the most recent downturn? Based on survey data, Maki found that about 35 percent of Americans who have dropped out of the labor force since the recession began in 2007 do want a job, but they have become too discouraged to fire off résumés. That’s a sign of a weak labor market. But the other 65 percent are people who have left the labor force and do not want a job. The biggest chunk of that group seems to be composed of baby boomers, those 55 and older, who have decided to retire early.

That suggests, Maki and his colleagues wrote, that unemployment will not necessarily start ticking up again as the economy keeps adding jobs, as many people expect.

“Such an event has not happened in the past and we do not believe it will this time either,” they argued.

Other reports find a smaller — but still significant — role for demographics. The Chicago Fed estimates that retirements accounted for only about one-quarter of the drop in labor force participation since the recession began.