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Eerie Trends: Labor Force Participation Since 1987

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    April 7, 2013

    Friday’s employment report was the major economic event of the week and it is one of the most closely watched indicators every month. The primary focus is on two items:  The number of new jobs, based on the Establishment Survey (a monthly survey of businesses), and the unemployment rate, based on the Current Population Survey (a monthly survey of households).

    There are, however, many additional metrics in the employment report. The data series I personally find most fascinating is the Labor Force Participation Rate. It’s a measure of the Civilian Labor Force (employed or looking for employment) divided by the Non-institutionalized Civilian Population (excluding children under 16, the military and those institutionalized).

    But what makes this series especially interesting is wide range of trends we can analyze based on various subcategories. Let’s take a moment to study the labor force participation rate (LFPR) by age cohorts. The earliest year for which the Bureau of Labor Statistics has participation rate data for all 5-year cohorts shown in the charts below is 1987, hence that start date in the first chart. All three charts illustrate the total growth in the participation rate for each age group based on annual data.

    As we readily see, the three fastest growers by far are the three oldest, with the 70-74 group up an amazing 91.2%. The rate for ages 75 and older (the one cohort that covers more than five years) is up 81.0%. In third place, with a 64.6% increase, is the age 65-69.

     

     

    In fact, these three outliers are precisely the three cohorts that fall under the unflattering heading of “Elderly” in the common parlance of demographers, who, for example, study the Elderly Dependency Ratio (aka “Old-Age Ratio”), which is the 65-plus population divided by the productive age population younger than 65.

    The next chart zooms in a bit, showing the same data, but starting in 1995, just as the roaring ’90s were taking off. My use of the phrase Roaring ’90s is largely prompted by the acceleration in equity prices that started in the middle of that decade, as is quite apparent on a log-scale chart of the S&P 500. It was about two years into this boom that Alan Greenspan, then Chairman of the Federal Reserve, immortalized the phrase “irrational exuberance“.

    First a quick look at the relative trajectory of years 1995 to 2000 in the S&P 500.

     

     

    Here now is a snapshot of the LFPR growth for our cohorts since 1995.

     

     

    From this starting point, the participation growth for the six oldest cohorts is in age order, the older the group, the greater the increase. The LFPR for the 50-54 age group was essentially unchanged (up a mere 0.6%). The rate for the five cohorts from age 25 to 49 all shrank by almost exactly the same amount; the range was -2.4% to -2.6%.

    The next chart starts with the turn of the century. Here we see that the 50-54 age group joins the younger cohorts in shrinking participation. Incidentally, earnings data tells us that the two five-year cohorts from 45-54 are typically the peak earning years for US households (more here). Since 2000 the LFPR for the 50-54 group is down 1.9% and 3.3% for the 45-49 group.

     

     

    It’s clear from the charts above that we elderly (yes, I’m one of the youngsters in that crowd) are working longer. And of course these statistics also include many retirees who have returned to the work force.

    What are the key drivers of the LFPR changes? They are many, complex and interrelated. My non-scholarly perspective would include the following:

    • Increased life expectancies
    • The decline in private pension programs
    • The financial implications of the decline in marriage and changing patterns of cohabitation
    • Inadequate retirement savings
    • Hypothetically adequate retirement savings that were devastated by the 21st century market selloffs
    • The discovery by many people that work is more satisfying than retirement leisure
    • Technological advances that replace human labor (a factor in the shrinking LFPR for younger cohorts)

    There are, of course, other factors, but these are the ones that immediately come to my mind.

    The Difference of 25 Years

    The charts above have focused on the growth (or shrinkage) in the participation rate by age group. I’ll close with a side-by-side comparison of the LFPR 25 years ago to the most recent annual data.

     

     

    We watch the monthly employment report for clues about where the economy is headed, largely oblivious to the fact that most of the data is subject to substantial revisions. But more fascinating by far are the broader trends that are defining a major aspect of the American experience — the role of work in our collective life cycle.

     


    See also my earlier LFPR study of broader cohorts with some gender breakdowns:

    Images: Flickr (licence attribution)

    About The Author

    My original dshort.com website was launched in February 2005 using a domain name based on my real name, Doug Short. I’m a formerly retired first wave boomer with a Ph.D. in English from Duke. Now my website has been acquired byAdvisor Perspectives, where I have been appointed the Vice President of Research.

    My first career was a faculty position at North Carolina State University, where I achieved the rank of Full Professor in 1983. During the early ’80s I got hooked on academic uses of microcomputers for research and instruction. In 1983, I co-directed the Sixth International Conference on Computers and the Humanities. An IBM executive who attended the conference made me a job offer I couldn’t refuse.

    Thus began my new career as a Higher Education Consultant for IBM — an ambassador for Information Technology to major universities around the country. After 12 years with Big Blue, I grew tired of the constant travel and left for a series of IT management positions in the Research Triangle area of North Carolina. I concluded my IT career managing the group responsible for email and research databases at GlaxoSmithKline until my retirement in 2006.

    Contrary to what many visitors assume based on my last name, I’m not a bearish short seller. It’s true that some of my content has been a bit pessimistic in recent years. But I believe this is a result of economic realities and not a personal bias. For the record, my efforts to educate others about bear markets date from November 2007, as this Motley Fool article attests.
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