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.

FEWER WORKERS?

Must we worry? When a smaller percentage of the population is working, does that mean that the overall standard of living must fall?
In the U.S., we have seen the labor force participation rates fall for the last 15 years. This rate is the percentage of the working age population that is either working, or actively seeking for work.
While the rate reached a peak of 67.3% in April 2000, it's been falling ever since to the current 62.9% in January of this year. This is a reduction of 4.4 percentage points.
Further, contrary to some opinion, the decline is not driven by "baby boomers" reaching retirement age. The chart below shows that the elderly population, here those 55 years or older, are becoming more active participants in the labor markets. Note in the chart that only two age groups, the "55 to 64 years" and the "65 and over", have increased their participation starting roughly in the late 80s.

The participation of those in the "65 years and over" group has increased by nearly 10 points over the last 25 years. One reason may be that given longer life expectancy, some people want to continue working when they reach what was traditionally considered retirement age. In other cases, it may simply be that they did not save enough for retirement, and are thus forced to continue working to supplement any retirement savings.
And all other age groups are less active in the labor force. This is particularly so for those 16 to 19 years, whose participation has fallen by nearly 20 percentage points. But of special concern are the declines in participation among those who traditionally have been viewed in "prime working age." That is, individuals in the 20 to 54 years of age.

The implication of these trends for the country are not good however. At the same time that we have accumulated a huge federal government debt, and continue to increase that debt, we have relatively fewer people working. Sometime in the future we'll have to pay the piper and, unlike Greece today, there will not be a Germany to save us.