One of the labor statistics that I like to follow is the participation rate. This measures the proportion of the working-age population that is participating in the workforce. Participating means employed or actively looking for a job. Our economy needs to maintain a high participation rate along with a high wage rate to justify the social safety net that has been promised — items like Medicare and Social Security. If wages do not improve, tax returns do not improve and the viability of the social items becomes doubtful. Likewise, people dropping out of the workforce means a drop in tax returns as well.
When it comes to participating in the labor force, there seems to be three reasons why people drop out — they are unemployed and have become discouraged enough to temporarily stop looking, they have better opportunities through gifts or a non-market solution, or they have reached a point where retirement is preferable. What it comes down to is the potential to re-enter the workforce or not. When people reach retirement, they like to think that it is permanent and will not be re-entering the workforce. In all other cases, the potential exists for re-entry.
I bring this up because there has been talk outside of the mainstream regarding the declining participation rate. The chart above takes annual data from the Bureau of Labor Statistics between 1947 and 2013. From a start below 60%, the series moved upward as two-income households became the norm in the mid-1960’s. The peak was reached in the 1997 through 2000 period at 67.1%. Since then there has been a nearly uninterrupted move downward to the current rate of 63.2%.
It may seem like a drop of 4 percentage points wouldn’t be much, but the impact on tax returns to fund those social programs is enormous. In a future post, I’ll bring in wage rates just to show the impact is coming from the declining participation as well as stagnant wages. For now, I’ll stay with the participation rate.
One of the jobs I have is forecasting. When it comes to forecasting population, it can be quite easy. For example, the number of 16-year-old people who will be entering the workforce in 2024 is known because we know the number of six-year-old children today. In fact, the Census Bureau has released a population projection for the United States between 2015 and 2060. The chart on the right shows the last ten years of actual data along with the next 45 years of estimates. Be careful reading the chart because the scale on the x-axis is linear but the data is from two series and has a different number of points per period.
Nevertheless, given our current birth rate and immigration rate, we will drop below the 60% participation rate in the early 2030’s and not recover before 2060. Now, there are two means to reverse this potential — increase the birth date and increase immigration or some combination with the second possibility being extending the normal working age. The item that is not included in the Census Bureau’s forecast is extended longevity and extended career viability. It is quite possible that people could live well past 100 years of age and it would be east to see a large increase in the workforce in their 70’s and 80’s. In the future, I’ll look into the change in labor participation by demographic. For now, there is a problem we are facing and it is longer-term than our representatives care to discuss. It will however start to drive people’s behavior and that will be something to watch.
This path of analytics was inspired by a chart from A. Gary Schilling. I’ll spend some time soon describing how I found the data and derived the labor participation forecast. The Census Bureau provided the population data, but I had to create the forecasted participation rate for that population.