YESTERDAY on Twitter, economist Justin Wolfers, whose wife is on President Obama’s Council of Economic Advisers, tweeted out the following:
— Justin Wolfers (@JustinWolfers) September 12, 2014
That post was a follow up to a post with a link to a recently published Brookings paper titled Labor Force Participation: Recent Developments and Future Prospects. From the conclusion:
The evidence we present in this paper suggests that much of the steep decline in the labor force participation rate since 2007 owes to ongoing structural influences that are pushing down the participation rate rather than a pronounced cyclical weakness related to potential jobseekers’ discouragement about the weak state of the labor market – in many ways a similar message as was conveyed in the 2006 Brookings Paper.
There’s been a lot of debate about the decline in the nation’s labor force participation rate. Some suggest it is the result of a weak economy and slack labor market, which is resulting in people giving up looking for work and leaving the labor force. Others, including Wolfers and others trying to defend the current administration, contend that it is structural shifts brought on by an aging workforce and baby-boomers reaching retirement. In other words, the economy is not that bad.
The 2006 Brookings paper noted above, which shares a co-author with the current Brookings paper, projected that the LFPR for the U.S. would decline from 2006 onward due to shifting demographics. The paper and its projection have been used by many to defend the declining LFPR, as well as the current Administration’s economic record and the current state of the labor market. The current paper also leans heavily on the findings to support its conclusions that the decline in the LFPR is due largely to structural factors.
While the 2006 paper predicted a decline in the LFPR, it overshot in its prediction, and only following the collapse of the labor market in 2009 did the actual LFPR and 2006 projection link up:
2004 (66) (66.4)
2005 (66) (66.1)
2006 (66.2) (65.8)
2007 (66) (65.6)
2008 (66) (65.2)
2009 (65.4) (64.7)
2010 (64.7) (64.4)
2011 (64.1) (64)
2012 (63.7) (63.7)
2013 (63.3) (63.3)
*as of 6/2014
Had the 2008 recession not occurred, it is likely that the LFPR would be above the projected levels based solely on structural factors (i.e., aging workforce). As a result, the argument that the change in the LFPR is due to structural factors is specious, and the current paper’s conclusions are also questionable.
Further, the authors of the 2006 and more recent papers do not address the issues of the decline in the employment-population ratio (EPR) for various groups. For starters, as with the LFPR, the EPR for the entire economy has declined since 2000:
Obviously if people are retiring then we would expect the EPR to decline as well. However, the prime age working population, which is far less impacted by structural changes in the laborforce such as retirement, has declined for both men and women:
And for those with a college degree:
The drastic decline in the above metrics reveals a cyclical problem in the economy and the labor market which cannot be accounted for by structural shifts (as the Obama defenders suggest). Further, the EPR for 25 – 54 year-olds for the U.S. has fallen more so than Canada, which faces similar structural challenges as the U.S.:
In other words, using Canada as a baseline by which to compare to the U.S. labor market, we see there clear evidence of strong cyclical problems.
The paper does note the roll of the 2008 recession on the decline of the LFPR, but minimizes that roll by suggesting the recession is responsible for just 0.25 percentage points of the 3 percentage point drop from 2007 to the first half of 2014. It’s tough to argue that the historically high number of marginally attached and part-time for economic reasons workers is not a larger drive in the decline in the LFPR:
In short, the attempts by the current Administration and its supporters to explain away the decline in the LFPR belie the current state of the labor market as evidenced by the data.