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.

93 MILLION, OR SHOULD IT BE 32 MILLION?

Much has been written lately about the 93 million working-age people in the U.S. who are today neither working nor looking for a job. These millions of people translate into the lowest rate of labor participation since the mid-70s, and even though it had risen to a peak of 67.6% in 1997 the rate has been declining since that year, as can be appreciated in the chart.
The chart shows that the labor participation rate was fairly stable between 1948 and the late 60s, hovering around 60%. Then it began a gradual and steady rise for the following 30 years until it peaked at the above-mentioned rate of 67.6% in 1997, only to fall continuously over the last 18 years. The increase in participation between the 1960s and the 90s is attributed primarily to increases in the female participation rate, as significant numbers of women joined the labor force and obtained jobs. In fact, female participation rose steadily from around 33% in 1948 to a peak of 60.4% in 1997.
 
But back to the 93 million. Often we read articles and hear opinions that, attempting perhaps to make a political point, imply or state directly that these 93 million are unemployed. They say that these people are not in the labor force because they have been shut-out of the market from a lack of employment opportunities. Granted, for some people that may be the case. Frustrated because they can't find employment they stop searching for a job altogether and, thus, are not counted anymore as part of the labor force. However a deeper analysis into the data shows that there are other reasons explaining why there are so many people not in the labor force and why this number will continue to increase in the foreseeable future.

Age Drives Participation in the Labor Force
The primary reason is the change in age structure of the population; that is, the fact that the U.S. population is getting older provides a partial explanation. The chart to the right displays today's population mix by age group (the red bars) compared to what it was 25 years ago in 1990 (the blue bars.) Each bar stands for the percentage of the year's population accounted by each age group. We can see the aging of the population in that the red bars are higher than the blue ones for the older three groups, that is people 45 years and older. This group represents today 52% of the working age population, up from 40% in 1990. Conversely, the under 45 years population fell from 60% in 1990 to today's 48%. Also note that the percentage drops for every bracket under 45 years.

The pie chart conveys a more clear view of the change in mix by age group since 1990. Over the last 25 years, the working-age population rose by 61.7 million persons, to this year's 251 million. Each slice in the pie represents the percent of the total change between 1990 and 2015 for each of the seven age groups. Thus, we can see that the largest change occurred among the 55 to 64 years group with 32% of the total change, or just under 20 million persons. Second in line are the two groups that bracket the 55-64 years one, each with 28% of the total.
These three age groups, 45 and older, thus represent 89% of the total change in working population, while they account for just over half (52%) of the total working age population.

Alternatively, we can examine this phenomenon by simply looking at the participation rates, shown in the chart. Statically, there is a significant drop in participation when a person moves from the 45-54 yrs to the next age bracket- the rate differential is 15.7 percentage points (from 79.3% to 63.6%). This means that the number of people in the labor force will drop by 15.7% over the next decade simply by the number of people in the 45-54 group who fall now in the 55-64 group. And the drop is more dramatic for the 65 yrs and older, the change in rte is nearly 45 percentage points. Again, this means that simply due to aging, in a year nearly half of the persons who move to the next higher age bracket will fall out of the labor force. There is virtually nothing that can be done about this trend- it's a demographic factor.

But Rates Are Dropping Among Younger Population
The curious thing is that the declines in participation rates are occurring mostly among the younger population. That is, persons under 45 years of age are the ones leaving (or not joining) the labor force. We find that, over the last 30 years, the younger a person is the more likely that he or she is leaving the labor force. Thus we see that for those aged 20 to 24 years the participation rate has fallen by 8.4 percentage points since 1985.

In contrast, we find that older people are bucking this trend, they are in general becoming more active in the labor force. One reason for this phenomenon is the fact that people are healthier today, live longer and have more productive years, and are capable to work when they are older- very likely they enjoy work. A second reason is economic necessity; there is a large number of people at retirement or near retirement age who do not have sufficient funds and thus are forced to work. Many of them may have lost their homes or savings in the financial crisis.
It is interesting to note that more people 70 years and older are joining the labor force. The participation rate for both men and women in that age group has increased by around five percentage points over the last 30 years. One would like to say that they enjoy working so much they've returned to the labor force, but it's more likely they are doing so out of sheer economic necessity. (The chart displays separately the data for men and women 70 years and older, this is because we don't have readily available the combined figure, although we know that it is around five.)

If participation rates had remained at their 1985 levels we would have today nearly 2 million fewer in the labor force- 155.7 million at the '85 rates compared to 157.5 million actual. But the mix is radically different; we would have nearly 7 million more in the labor force who are younger than 45 years and, conversely, about 8.9 million in the 45 and over age group. The more younger people are in the labor force, the greater promise of larger economic output in the future (younger people have more working years in their future naturally) and paying more to many government pension plans, such as Social Security at the Federal level, that depend on the ongoing contribution from working people to remain viable.

So the more relevant figure to discuss is 32 million, rather than the touted 93 million. Thirty two million is the number of people under 45 years of age who are not in the labor force. That is, who for one reason or another are not interested in joining the labor force and becoming productive members of the U.S. economy.

EXPANDING WORLD...SHRINKING COUNTRIES

The recent news that Japan's population count continues to fall brought to mind the similar seemingly irreversible trend that other countries are facing, several of them in the developed first world. We see an scenario like Japan's playing for those countries over the next years. But also, more revealingly, many of these countries with falling population are in what was formerly the Soviet Union or its satellites, such as Cuba. Russia itself, still the 9th most populous country in the world, has seen its population drop dramatically since the fall of the Iron Curtain. However, as the chart nearby shows, Russia's population appears to have stabilized this decade- perhaps Putin's expansionary policies of slowly swallowing the Ukraine, after taking Crimea last year, may be working after all. But aside from this lull in the long term trend, Russia's population is projected to fall a further 2% by the year 2015.

Shrinking Countries
In total, we find that 23 countries, out of the 158 with population above one million inhabitants, will see their total population fall over the next 10 years. The majority of them, shown in light blue bars, were part of the former Soviet Union. In fact, only 4 out of these 23 are outside the former Soviet Union area. Most notably is Germany, the so-called economic engine for Europe, whose population 10 years from now will be about 2% lower. And poor, sad Greece, on top of its intractable economic debt problems, will see its population fall by another 1% over the next decade. This trend only compounds the likelihood that it will never be able to pay its debts.

Now a declining population is not necessarily a bad thing; in fact, if you are an ardent follower of Paul Ehrlich you'd think it's a good thing. But ignoring Ehrlich and his always-wrong predictions about the end of the world caused by high population growth and limited resources, the fact is that the declining population in these countries is accompanied with fewer working-age people who are expected to sustain its elderly folks. And this is where a crisis could originate.

Thus we find that many of these countries also face an "elderly population" problem, that is an increasing elderly population with all the potential burdens that this implies. Living longer is a blessing if one is a healthy individual; it could be curse if infirmities take over the body. Although there is no hard and fast rule at which point an elderly population becomes an onerous burden, we can assume that a critical point may be reached when this group exceeds one fifth, that is 20%, of the population. Given the relatively high unemployment rates in these countries, except Germany of course, combined with declining labor participation rates, we find fewer working people forced to sustain the elderly population (through taxes or debt to maintain the levels of support services required.

The chart to the right displays the percentage of the population that is 65 years and older for the 23 countries whose population is falling. Nearly half of them are above 20%, and several others are hovering just under this percentage.
The chart shows that leading all is Japan that by the year 2025 will have over 30% of its population aged 65 years and over. Germany is not far behind with fully one quarter of its population in this age group; Greece posts a percentage slightly over 23%.




Rest of the World
There are several other countries, twelve in fact, that also have a relatively high percentage of their population among the elderly. These countries are shown in the chart to the right, above the 20% horizontal line. But these countries have the advantage that their population is growing- this means that the number of working people to help sustain the elderly is not necessarily falling.
many countries, xx in fact, that also have a relatively high percentage of their population among the elderly, but at least they will see their population grow over the next few years.
We see that the United States falls in this group, with population growth of 8.1% over the next decade or just under one percent per year. Canada will have about 23% of its population in the 65+ years group, but has modest growth of 7% over the next ten years. But Finland and Italy, have nearly a quarter of their population in the elderly group and show very low rates of population growth- 2.8% and 1.2% each, respectively.

Is all downhill from here?
But there is some sunshine behind these gray clouds. Many of the elderly are not necessarily quitting the workforce altogether, since they are continuing to work. This is particularly evident in the United States where we find that the labor participation rate among the "65 year and older" group has doubled over the last 10-15 years (see my post for evidence: http://econlives.blogspot.com/2015/03/fewer-workers-must-we-worry-when.html.) Moreover, as Anthony de Jasay has pointed out recently, more elderly people will be able to work in the future as the nature of work will be much less demanding physically, he says "fewer and fewer jobs in the modern world call for much physical exertion for which the old would be unfit."

STATE OF THE NATION'S HOUSING - 2015

No, I didn't think of this post title myself, it's plagiarized from the latest report by the same name issued by the Joint Center for Housing Studies at Harvard, that I discuss here. This year's report is another of a long sequence of annual reports going back to the 1980s, where the Joint Center offers its analysis and views on demographics and housing in the U.S.

As always, the reports are well written and strongly based on facts and good analysis, highlighting key events in the housing markets during the previous year and where things stand today. Following are a few key points taken from the report, that you can download for free here (http://www.jchs.harvard.edu/research/state_nations_housing).

The report is divided into five sections, led by an executive summary and ending in an appendix of data tables. The five sections cover the following areas described in the chapter titles: Housing Markets, Demographic Drivers, Homeownership, Rental Housing and Housing Challenges. The data appendix is available in Excel format, which is always a nice and convenient gesture. An overview of each section follows, ending with a brief critique of my own.

Housing Markets
In a retelling of last year's housing market, they point out that its contribution to GDP of just 3.2% is significantly less than the 4.5% average since 1969. Home improvement expenditures, that peaked at about half of the total residential construction spending, was down to a third of the total. Both new and existing home sales were weak last year, relative to their volume in the early 2000s, although they were already above the recession lows in 2008. However, the housing markets last year slowed down relative to the modest recovery in the previous two years.
Many homes are still stuck in the foreclosure process, with an estimated 920 thousand units in foreclosure. These homes in foreclosure, combined with homeowners who can't move because they have little equity in their current home (thus being unable to come up with the required down payment) or are underwater- 10.8% of homeowners fall currently in this category.
Further, the lower residential mobility due in part by aging of the population is reducing the inventory of homes for sale. (For details on mobility trends see my post http://econlives.blogspot.com/2015/03/are-we-becoming-sedentary-nation.html)
Their outlook for the housing market is that the "...recovery is likely to continue at only a moderate pace until income growth picks up and rising home prices help to reduce the number of underwater and distressed homeowners."

Demographic Drivers
Two well-known trends are the focus in this section: aging of the U.S. population and the rise of minorities. The pressures of these two trends will change the dynamics of housing in the U.S. The majority of household growth in the next decade, 76% according to Joint Center calculations, will be due to minorities; this will rise to 85% in the next twenty years. The foreign born represent a significant source of housing demand, accounting for nearly a third in the 2000s. Event hough immigration slowed down after the 2008-09 recession, net international immigration jumped to just under a million last year. Interestingly, the Joint Center reports that Asians make up now the largest shared of immigrants while Hispanics, particularly from Mexico, continue to lose share.
The report also points out that although median real household income has rose 2% between 2012 and 2013, to $51,900, it still is 8% below its 2007 peak, and in reality equivalent to 1995 income. And median household wealth is, in real terms, still 40% from the 2007 peak and at its lowest level since the 1990s. The fall in wealth is due mainly to the losses suffered in the housing crash. The median home equity in 2013 was nearly a third below that of five years before.
Even though households' home equity has improved, many are still burdened with huge student debt. The Center indicates that 20% of all households had student loan debt in 2013, more than double the rate of 25 years before.
The Joint Center is calling for a growth of about 1.2 million households annually in the next 10 years. But they warn about the 42% rise of older households (over 65 years of age) and the doubling of those 80 years and older. This "...will test the ability of the nation's housing stock to address the spiraling needs for affordable, accessible and supportive units."

Homeownership
Although homeownership is not covered in detail until the fourth chapter, this is first topic discussed in the Executive Summary. The main point is the disastrous decline in homeownership since the housing crash in 2004, to the current rate of 63.7%- the lowest it's been in more than twenty years. Plaudits to me for having discussed this issue in an earlier post in this blog (http://econlives.blogspot.com/2015/06/fewer-homeownersmore-renters.html), so nothing new here, at least for me or anybody else who may have read my post.

The Joint Center report, however, points out that a further reason for the decline is the inability of many people to obtain mortgage loans, due to more stringent standard followed by lenders, who were bitten after the housing boom.
The report concludes this section saying that most households "... regardless of race/ethnicity, age, and lifestyle - still consider homeownership a positive goal." Surveys conducted by Fannie Mae reveal that 82% of respondents think that owning made more financial sense than renting. So the only constraint to a recovering of the homeownership rate is whether households can obtain the means to achieve it.

Rental Housing

The report indicates that the flipside of declining homeownership is a concomitant increase in rental housing. The chart to the right, also taken from my earlier post, clearly shows this phenomenon.
But the Joint Center report further illuminates how a large number of single family units are taking the role of rental homes. In fact, the single family units share of rental market has risen from 31% in 2004 to 35% last year. That is, the supply of rental units is not met by multifamily structures alone, but also single units.
An interesting point regarding this is that large rental companies have been purchasing many of these single units to use them as rental. But, as was pointed out during the web conference, it's still an open question whether those rental companies can manage well those units given that it's difficult to standardize and apply the same practices across all units, as you would do in a multifamily building where all the units are very similar.

One of the valuable traditional roles of these reports is their evaluation of the policy implications of the current state of affairs in housing. This year's report is not different. Although the number of households with high house cost burden has fallen, this improvement comes from the homeowner side; primarily due to falling mortgage costs and modest income gains (p. 30). But for renters, the situation is not better- particularly for low-income renters. They recognize the continuous need of good quality rental units that are within the financial ability of renters. The report does not provide any specific advice on how this can be achieved, other than it "requires the persistent effort of both the public and private sectors."

Housing Challenges
The main challenge is the heavy cost burden for many renter households. While the burden for homeowners eased a bit, first because many lost their homes to foreclosure and then low interest rates reduced their monthly payments, the burden on renters has increased. The Joint Center finds that just under half of all renters fall in this category, that is their rental payments take 30% or more of their paycheck, thus cost-burdened renters reached a high of 20.8 million households. High rental costs leave those households with little to spend on food, clothing and other things naturally.

Additionally, even though housing may take a large share of their income it does not ensure that housing will be adequate; that is, housing with deficiencies in plumbing, electrical and heating systems. This is the second challenge posed by the Joint Center in its report. About 10% of renters who earn less than $15,000 live in inadequate housing. The supply of housing for low-income households is also wanting. The Center reports that in 2013, 11.2 million low-income renters (that is, earning less than 30% of the area's median income) competed for the 7.3 million affordable units- this leaves a shortfall of 3.9 million units.

The solution proposed is more housing assistance, either by tax credits or subsidies, and also a capitalization of the National Housing Trust Fund. They point out an advantage of this fund is that it is not subject to annual appropriations but, rather, has a predictable stream of funding.

Any Criticism on the Report?
The only thing that seems to be missing from this report is an evaluation of the impact that regulations, both building code regulations and financial ones imposed by the Dodd-Frank bill, have on low-income housing and housing overall. Each individual building code has its own merit indeed, who wouldn't want to not use safer materials, for instance? But what is the combined effect of all those codes, both national and local, on building costs? Similarly, the 2,300 original pages of Dodd-Frank bill have already spawned about 14,000 pages of regulations, many of those impact mortgage lending through additional paperwork. What are the additional costs on a house or rental unit?
But maybe this analysis is out of the purview of these Joint Center reports.