What Accounts For The Decrease In The Labor Force Participation Rate?

question-markMy Comments: I bet you are saying this is just another weird observation from Tony. And you may be right. But mindful that many of you, and many of me, are thinking of ways to predict what the markets will do this year. So…

A reasonable predictor of future market movements which translates to whether your investments improve or go in the tank, is economic activity. Is the economy growing and are companies earning money? We have been concerned about unemployment for the past few years and vigorously questioned why more people aren’t working.

Critics of the administration point to a lack of effort to find ways to get people employed, while at the same time refusing to fund projects that will replace and improve road and bridges and other infrastructure that is decaying rapidly. This article point to another little noticed demographic change as one reason for the trend.

By Ellyn Terry, an economic policy analysis specialist in the research department of the Atlanta Fed. Jan. 19, 2014

Despite the addition of only 74,000 jobs to the economy in December, the unemployment rate dropped significantly- from 7 percent to 6.7 percent. The decline came mostly from a decrease in the labor force.

Since the recession began, the labor force participation rate (LFPR) has dropped from 66 percent to 63 percent. Many people have left the labor force because they are discouraged from applying (U.S. Bureau of Labor Statistics data indicate that a little under 1 million people fall into this category). But the primary drivers appear to be an increase in the number of people who are either retired, disabled / ill, or in school.

Certainly, the aging of the population accounts for much of the increase in the retired and disabled / ill categories. Still, there has been a lot of movement over the past few years in the reasons people cite for not participating in the labor force within age groups. Knowing the reasons why people have left (or delayed entering) the labor force can help us understand how much of the decline will likely halt once the economy picks back up and how much is permanent.

The chart below shows the distribution of reasons in the fourth quarter of 2013. (Of the people not in the labor force, 1.6 percent indicate they want a job and give a reason for not being in the labor force. They are categorized here as “want a job” only.) Young people are not in the labor force mostly because they are in school. Individuals 25 to 50 years old who are not in the labor force are mostly taking care of their family or house. After age 50, disability or illness becomes the primary reason people do not want to work- until around age 60, when retirement begins to dominate.