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Monday, February 4, 2013

Labor Force Participation: Separating the Truth from the Lies


The sky is falling! And the labor force participation rate is down!  (Sounds of wailing and gnashing of teeth.)

American workers from American Progress


The Truth about the Civilian Labor Force: 


First of all, what is the "labor force participation rate" and what is the "civilian labor force"?
  • This is the percentage of people in the civilian non-institutional population 16+ who are either employed (working) or looking for work.  (This group of people who are either working or actively looking for work is called the civilian labor force.)
  • A related measure is the "employment participation rate" which is the percentage of people in the civilian non-institutional population 16+ who are actually employed. 
  • The "civilian non-institutional population 16+" is the base from which the unemployment rate is taken.  It includes ALL civilians who are 16 or over who are not in prisons, nursing homes, or other care facilities.  By definition, it excludes people in active military service.  It does include civilians who work for the Department of Defense.  And it includes everybody who lives or works in this country (I believe that diplomats are not counted) and meets that definition whether they are here permanently or temporarily, whether they are citizens or non-citizens.
  • So this "civilian non-institutional population 16+" base includes kids in high school, students in college, people staying home with young children, people who are disabled as long as they are not in nursing homes, retired people, immigrants, and 85 year old grandmas as long as they are not in nursing homes.
  • The civilian labor force is now the largest that it has EVER been. It is higher in numbers than it was during the Clinton years or during the 2005-2007 time frame. We have NEVER had as many people in this country either employed or actively looking for work. 


Yes, the labor force participation rate is declining...

....and has declined throughout the recession.  It may have bottomed out.. a little.  The employment participation ratio also has declined and it has definitely bottomed out and is starting to increase in some population groups.  Are these facts meaningful?  Is the low labor force participation rate a sign that the economy is really still going downhill even when the unemployment rate is (over a period of months) declining and the number of jobs and people employed continue to increase.. and are approaching 2008 levels?

Some suggest that the labor participation rate (or the employment participation rate) a "better" indicator of unemployment/employment.  Any truth to that?

Only in the garbled brains of Republicans and their brainwashed devotees.  

The civilian labor force participation rate or the employment participation rate are just TWO of the measures of labor market conditions, but they certainly are not BETTER.  Some of the people who grace the right wing think that the "real" unemployment rate is the reverse of the employment-participation rate, in other words, the number of people in the civilian non-institutional population 16+ who are actually not working.  That would mean an "unemployment" rate of about 40% now!  Now why would anyone want an "unemployment" rate that includes 85 year old grandmas, 16 year-olds in high school, people staying home with children, people who are disabled, and millions of people who are retired?  How would that clarify the labor situation at all?  (Almost all definitions of "unemployment" include the idea that the unemployed person wants to work or is involuntarily unemployed.  They don't include people who are unemployed by choice.)



So what is the significance of the drop in the labor participation and employment participation rates?

People who talk about this drop usually miss a few things: 


1. The drop in the labor participation rate is largely due to aging of the population.

We've added 9.6 million people to the "civilian non-institutional population 16+" since January 2009.  9.5 million of them are 55+ and 5 million of them are 65+.  People 55+ are in the labor force at half the rate of people 25-54, in good times and bad, and there are many more people 55+ in recent years.  People 65+ are in the labor force at about a quarter of the rate of people 25-54 and there are many more people 65+ in recent years.

It doesn't take an MS in statistics to realize that that kind of change in the age of the population is going to cause a major drop in the labor force participation rate. 


2. The labor participation rate has been DECREASING for people younger than 55 since the late 90's.  

We never really recovered from the early 2000's recession. We never achieved the kind of unemployment rates that we had in the late 1990's.  We never achieved the kind of labor force participation rates that we had in the late 1990's either, but you will never hear the people who bemoan the drop in the labor participation rate mention that.

However, the labor participation rate has been RISING among people 55+ since the mid 80's.  The increase in the Social Security retirement age MAY be one of the reasons that the labor participation rate is increasing among older people in the last ten years. Better health may be another:  People want to continue to work and they do so.  More desk jobs may be another reason:  People can work longer at a sedentary job than they can if they are involved in heavy physical occupations. 

But the fourth reason is more disturbing:  Older people may simply have fewer resources in terms of assets than they had in earlier decades, such as the golden age of the middle class.  They HAVE to work.. if they can find a job.  This would NOT be a good thing.

The growing 55+ labor force may also be causing problems in the availability of jobs for people 25-54.  If older people were leaving the work force at the same rate that they left the work force a decade earlier, the unemployment rate could be almost two percent lower than it is now.  We'd have about 3,000,000 fewer people 55 and over in the civilian labor force and that could result in an unemployment rate up to 2% less than it is now, or an unemployment rate around 6%.    

3. We don't know what a good "labor participation rate" should be.

It's not good if people can't retire. It's not good if people can't stay home with kids. As mentioned above, back in the golden age of the middle class, labor participation rates were lower than they are today.

We should actually want a lower labor force participation rate among people who are older (It's a good thing if people can actually afford to retire.) We should actually want a lower labor force participation rate among teenagers and young adults. (They should be in school.) We should actually want a lower labor force participation rate among people having children so that more parents can stay home with their kids when they are tiny and not have to run back off to work when the kid is 6 weeks old. 

But we haven't done any real work as far as I can tell on what would be acceptable labor force participation rates for these various segments of the population.  So we politicize and resort to name-calling.  We don't know what a "good" labor participation rate is for any of the segments of our population.    

Clearly we still have millions of people unemployed who want to work for whatever reason.  We still have an employment crisis.  But let's deal with REAL problems as indicated by the REAL unemployment rate.  Let's not make up some craziness about the "labor participation rate".

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