Wednesday, April 6, 2011

Quantifying the Boomer Effect on Labor Force Participation

I know that many people have commented recently on the impact of the baby boomers on the labor force (and the participation rate), but I wanted to put attempt to quantify that impact. I drew upon Table A-6 from the Current Population Survey and the historical labor force statistics from the Current Population Survey for much of this data. I am going to look numerically at the labor force, but will also be drawing a few conclusions to the unemployment rate as well (this will be a graph free post).

The baby boomer generation coupled with longer life expectancies have changed demographics (let alone economics) in this country profoundly in recent years and have skewed some of the metrics by which we measure economic health (and a recovery from recession). For instance, since 2007 over 1.5 million people age 65+ have left the labor force (whereas between 2003 and 2007 roughly 960k left of that same age cohort). This large nominal change in those leaving the labor force (and the growth in the general size of this age cohort) impacts the labor force participation rate as this age group has a much lower participation rate than those less than 65 (even though the rate for those 65+ is rising, it is still extremely low in comparison) and growth in their population as a percentage of total population will continue to place downward pressure on the labor force participation rate. Thus, even if the participation rate of those 65+ rises, the overall effect on the participation rate will be lower as the weight of the population 65+ increases.

For the numbers, from the beginning of the recession until the most recently released data, demographic changes alone have accounted for taking roughly .3 off of the labor force participation rate. From 2003, those demographic changes have been responsible for roughly .57 points off the labor force participation rate (in other words, if we had the same age mix of the population we had in 2003, the labo0r force participation rate would be .57 points higher). While these numbers do no sound very big, they are huge in terms of changes to the participation rate, as the annual average for the rate in 2003 was 66.2 (today it is at 64.0), which means that roughly 26% of the drop in the participation rate from 2003 to today can be attributed to changing age demographics (obviously other factors come into play here as well since only 15% of the drop since the recession began can be attributed to those demographic changes).

An inverse of this relationship occurs with the unemployment rate, as those 65+ typically have the lowest unemployment rate among all age cohorts (obviously since many are retired or could be and thus the percentage of those who need/want to work is much smaller). Thus, as this group's percentage of the population (and labor force, where it has risen from 3.9% to 4.6% just since mid-2008) increases, it will place some downward pressure on the unemployment rate (although at this point that difference is a relatively modest .02%).

To sum all this up, the boomers will have a much bigger impact on the participation rate than they will on the unemployment rate, but they will have an impact on both and that impact will be increasing as more of that generation turns 65 (really 62 when they are first eligible for social security, but I haven't found a way to measure those 62-64 yet).