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Low Labor Force Participation Not Demographics

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    December 5, 2013

    “Son, someday robots are going take my job.”  It was the late 70’s and my father was convinced that these “new fangled” computers were going to steal his job. At that time no one believed him but as it turns out he was right.  I have written extensively since the end financial crisis about the structural change to employment in the U.S. and the push to increase productivity to reduce employment costs and boost profitability.  I addressed this issue specifically in “The Great American Divide” stating:

    “Suppressed wage growth, layoffs, cost-cutting, productivity increases,accounting gimmickry and stock buybacks have been the primary factors in surging profitability. However, these actions are finite in nature and inevitably it will come down to topline revenue growth. However, since consumer incomes have been cannibalized by suppressed wages and interest rates – there is nowhere left to generate further sales gains from in excess of population growth.


    “This is why the gap between corporate profits and the number of working employees is the highest level on record.  Fewer workers, higher productivity and longer hours for the same pay, or less, equals higher corporate profits.  This is great for executives, primarily the top 10% of wage of earners, who are compensated from rising share prices, bonuses and other performance related compensation.  However, for the ‘working stiff,’ there is little reward for their labor.”

    This “shift” has been critical to the employment landscape in the U.S. over the past 5-years as the number of individuals that are no longer counted as part of the “labor force” has risen above 90 million individuals which equates to roughly 36% of the entire working age population that are 16 years or older.  The chart of the labor force participation rate shows this problem graphically.


    The dramatic drop in the LFPR since the turn of the century has been dismissed as a function of the “baby boomer” generation reaching retirement age.  The problem with that assumption is that a large portion of the “boomer” generation is unable to financially retire and are holding onto their jobs for both incomes and healthcare.  Secondly, even assuming that the “boomers” do all retire it does not fully account for the drop in the labor force participation rate.

    In a recent study entitled “Labor Force Participation And Monetary Policy In The Wake Of The Great Recession,” by Christopher Erceg and Andrew Levin of the Federal Reserve Board, the authors provide solid evidence that the decline in the labor force participation rate since 2007 has been due to cyclical factors–the recession and slow recovery–rather than to demographic factors.  The chart below shows the estimate of how large the US unemployment rate would be without this abnormal decline in the labor force, and they produced this amazing chart which summarizes their findings.

    erceglevin 26aug2013-fig-6-right

    In other words, due to the weak economic recovery a large number of people have simply“dropped out” of the labor force but are not retired. Since the unemployment rate does not count the people who dropped out of the labor force it no longer gives a good reading of the state of the labor market. The unemployment rate would be much higher without this large decline in the labor force participation.


    There really is no longer a debate over labor market performance during the recent recovery as both are unusually weak.  This also no clear way to measure the millions of individuals who have disappeared into the abyss of the uncounted.  Many of the 90 million individuals that are currently unemployed, and not counted by the BLS, would likely be more than happy to work given the opportunity.  However, in the current economic environment, those options are not widely available which is why there is very much a silent “depression” running through the underbelly of this economy. While we may not see the breadlines and soup kitchens that existed in the 30’s, it is simply because they exist electronically and in the mail.

    The real debate needs to be over the current economic policy makeup which is deterring real employment growth in the U.S.  The lack of fiscal policy from Congress, and dependence on monetary policy from the Fed, is not the prescription that this particular ailing patient needs.

    Images: Flickr (licence attribution)

    About The Author

    Lance Roberts – Host of StreetTalk Live

    After having been in the investing world for more than 25 years from private banking and investment management to private and venture capital; Lance has pretty much “been there and done that” at one point or another. His common sense approach has appealed to audiences for over a decade and continues to grow each and every week.

    Lance is also the Chief Editor of the X-Report, a weekly subscriber based-newsletter that is distributed nationwide. The newsletter covers economic, political and market topics as they relate to the management portfolios. A daily financial blog, audio and video’s also keep members informed of the day’s events and how it impacts your money.

    Lance’s investment strategies and knowledge have been featured on Fox 26, CNBC, Fox Business News and Fox News. He has been quoted by a litany of publications from the Wall Street Journal, Reuters, The Washington Post all the way to TheStreet.com as well as on several of the nation’s biggest financial blogs such as the Pragmatic Capitalist, Zero Hedge and Seeking Alpha.