WORKERS & NON-WORKERS

Almost two years ago I initiated this blog with a brief piece on the fact that many Americans appear to be less willing to join the labor force. That is, the article dealt with what is commonly referred as the declining labor force participation rate. I thought that today, when I am trying to revive my blog, it would be interesting to revisit that theme. Hopefully, my (real) work commitments will allow me more free time to continue writing this blog in the future, since I truly enjoy writing it, and that I hope readers find it useful.

Labor Participation Rates

A lot has been written lately about the declining labor participation rates in the U.S. That is, the percentage of the population of working age, 16 years and older, who are either working or looking actively for a job. Most of the time, however, the commentary just focuses on the overall rate and, more troublesome, it is stated with the intent of making a political point.

The fact is that, yes, the participation rate is falling but the cause is not necessarily misguided economic policies or that we are becoming lazier. Although, we must admit, economic policies may have had a negative impact.

The chart to the right displays the average participation rate, by decade, since the 1950s. This is the data that we commonly see, although usually not grouped by decade as I've done here.
We can clearly see that the rate rose from the 1960s to peak sometime in the 90s, and it has  been declining since then. For the current decade it has averaged 63.4%, with the latest reading in December of last year at 62.7%. This is a significant drop from the 1990s average of 66.7%.
The question that obviously arises is what is behind this decline? I try to provide some answers here.

Why the drop in participation rates?

The first place to look is participation rates according to age. And this is where we begin to get an explanation for the falling rates. The chart nearby shows trends in participation rates for the major age groups, going back to 1951.
The four lines at the top of the chart, representing the rates for the four age groups in the 25 to 54 years old bracket, show that the participation rate generally peaked in the late 80s or early 90s. Since that time the rates for the four age groups, within the 25-54 bracket, have been falling. The decline has been gradual for those aged 25-34, 35-44 and 45-54 years, but more rapidly for the younger 20-24 year olds.
The latter group, 20-24 year olds, has seen a decline of nearly 10 percentage points since the late 1980s. The other three groups have declined by a much smaller percent, they are between three and four percentage points below their corresponding peak rate.

The biggest declines are in the 16-19 year old group. Although the data series for younger people begins in 1976, it's evident that participation among this group peaked early in August 1978. The rate fell gradually between 1978 and the end of the century, but still a 10-point drop, only to drop precipitously from the beginning of this century. Labor participation among 16-19 year olds stands currently at 34.8%, nearly 25 percentage points below what is was in 1978. Further, as implied above, fifteen of those twenty percentage points have been lost since 2000. Naturally an issue that needs to be explained is why this sharp drop occurred among our youngest working-age population.

Changing Gender Roles
A disturbing phenomenon is the declining trend in male participation in the work force. Back in the 1950s, a very large proportion of males were active in the labor force, particularly in comparison to females. For 1951, for instance, the male labor force participation was 86.5% while only 34.6% of females were in the labor force. Males were more than twice as active in the labor force as females.

If we fast forward to today, we find the male rate is 69%, that is 15 percentage points lower than in 1951. In contrast, females started joining the labor force in droves beginning the 1960s so that today we find that nearly 57% of females are in the labor force- this is a gain of more than 20 percentage points.
The chart to the right vividly illustrates these opposing trends. This secular decline in male participation provides a partial, albeit small, explanation for the overall losses in the U.S. overall participation rate.

People Who Don't Join the Labor Force

As population grows or people age, a number of them naturally opt to either leave the labor force or not join it altogether. It is expected that as people get older the appeal or necessity of work declines. Also, people at different ages may decide to leave the labor force for a variety of reasons, such as dads who decide to stay home to take care of children or simply be the principal homemaker. In fact, the Pew Research Center found that between 1989 and 2012 two million males stayed home taking care of their kids- an increase of nearly one million in 23 years (http://www.pewsocialtrends.org/2014/06/05/growing-number-of-dads-home-with-the-kids/)


But who are these people?
Our investigations show that over the last 30 years, that is since 1986, working age population has increased by 72.8 million and the labor force by a smaller 31.5 million. The difference, 27.4 million, represent the additional number of people who were not in the labor force by 2016.

Looking deeper into the data we find that most of the decline is due to the aging of population. In fact,  42% of the decline since 1986 is due to an increase in the number of people who are 65 years or older. And a further 15% came from people in the 55 to 64 years group.

Thus, a reasonable explanation for the lower participation rate is demographic. It is simply disingenuous to lay the blame on people being lazier today or perhaps that government programs are the principal cause of the labor force decline.
From the chart above, showing participation rate trends by age group, we can easily see that as a person ages and moves from one age group to an older one, his or her participation rate will change. For instance, if nothing changes but time passes by a year, we will automatically see a drop in the participation rate. People who are in the 55-64 group who move to the 65-plus group will see their participation drop from 64.3% to the 19.5% of the older group.

Older People More Active
The interesting thing is that labor participation rates among the older population groups has actually increased. For the 55 to 64 year old group, the rate peaked in 2009 at 65.7%, just a shade higher of what it is today (64.3%.) But the most interesting one may be the oldest group. The participation rate for people aged 65 years or older had been declining until the mid-80s, when it stabilized roughy around 12%.  It turned around from the beginning of the century, and it has been rising to its current rate of nearly 20%. Their higher participation rate is ameliorating the decline somewhat.

Two factors may explain the rising rate among the older groups. One is that people are living longer and, thus, many are opting to continue working because of the satisfaction that work provides for them. Another reason, and more compelling, is that some people don't have sufficient income to enable them to retire comfortably. This could be either because their financial situation worsened as a consequence of the 2008-09 economic recession, when many people were devastated financially, or they did not plan properly for retirement.