September 12, 2013
There has been a huge drop in employment in this downturn with the employment to population ratio (EPOP) still only 0.4 percentage points above its low for the downturn. It is still more than four full percentage points below its pre-recession level. Clearly part of this is due to the weakness of the economy, but part can be due to people voluntarily opting out of the labor force.
One reason to think the latter could be important is the aging of the baby boomers. The oldest baby boomers are now 67 and more than 40 percent are over age 60. With an increasing portion of this group edging into retirement, it is reasonable to expect a decline in the employment to population ratio. However, it turns out that aging is not a major factor in the drop of the EPOP. According to the OECD the EPOP for prime age workers (ages 25-54) is also four full percentage points below its pre-recession level.
Gavyn Davies looked at these data and concluded that most of the drop-off in EPOPs can be explained by a long-term trend towards lower labor force participation rates for men. There are two problems with his story.
First, we don’t expect every trend to continue. The labor force participation rate for prime age men fell by more than 8 percentage points from the early 1970s to 2010. Do we really think it will fall by another 8 percentage points over the next 40 years? Davies indicates this decline may be in part attributable to a more even sharing of child care responsibilities and presumably more women in the paid labor force. However the latter trend has largely ended, so this cannot provide a basis for a further drop in men’s labor force participation.
However the more bizarre part of Davies story is that while he focuses on trends supporting his contention that labor force participation should drop, he ignores the obvious one pointing in the opposite direction. This would be the sharp rise in labor force participation among older workers. This has risen by more than 10 percentage points since 1990. Barring a major change in the financial situation of older workers (Obamacare could be one such change), it is likely that this ratio will continue to rise in the years ahead as many baby boomers continue to work rather than retire.
Comments