Decreasing Participation Rate Consequences

One of the measures I have been following is the participation rate in the United States. As a reminder, the participation rate is the number of people who are employed or actively looking for work as a percentage of the civilian non-institutional population.I like following this measure because it can tell us more about the economy than the unemployment rate, as I will discuss.

The participation rate has been decreasing since 2000. The economy was flying high back then and the incentive to work through high wages and the possibility of great wealth was very strong. Two recessions since that year has caused unemployment to rise significantly twice. In contrast the participation rate should remain stable even as employment drops because the number actively looking for employment will rise and the two numbers offset each other. Instead we have seen the participation rate drop from about 67% to about 62%. That drop means that not only have people lost employment, but they have stopped actively looking for work. If you think that a drop of 5% is not much, the rest of this analysis might change your mind.

Table 1. Participation Decomposition
Measure Year Value
Population Feb-2000 211,576,000
Feb-2014 247,085,000
 
Participation
Rate
Feb-2000 67.0%
Feb-2014 62.7%
 
Static Level
Participants
Feb-2000 141,775,000
Feb-2014 165,547,000
 
Actual Participants 155,027,000
Missing Participants 10,520,000

Since the February data was recently released, let’s use that for this analysis. Back in February 2000, the participation rate reached a peak of 67.0%. If we take the civilian population of February 2014 (247,085,000) and multiply it by 67%, we get 165,547,000. This number represents the potential civilian labor force given the observed peak in participation rate, or the Static Level Participants in Table 1. The labor force as of February 2014 was 155,027,000. The difference is 10,520,000, what we should call the additional non-participation population.

The population over this period has not remained constant. From February 2000 to February 2014, the population has grown from 211,576,000 to 247,085,000. The labor force back in February 2000 was 141,775,000. Looking at this as a breakdown of factors, the increase in population indicates 23,772,000 additional people should be in the labor force. With the decrease in the participation rate, 13,252,000 are non-participating.

Table 2. Recalculating Unemployment
Measure Value
Unemployed 10,893,000
Employed 144,134,000
Rate 7.0%
Missing Participants 10,520,000
Static Level Rate 12.9%

Let me take a side step and mention unemployment. Calculating the unemployment rate is taking the number of unemployed and divide by the sum of employed and unemployed. The current rate is 7.0%, which you can follow from Table 2. Notice the sum of the unemployed and the employed is the same as the Actual Participants in Table 1.

With those numbers, we can move to our first conclusion. If we assume the participation rate was currently at its observed peak, we should add the missing participants to the current unemployed numbers (this assumes the missing participants have reached the point where they are discouraged enough they are no longer actively looking for work rather than the possibility they are better off not working). The new calculation becomes the sum of the unemployed plus the missing participants divided by the sum of the unemployed plus the missing participants plus the employed and reach a figure of 12.9%. Since we are working with February of 2000, contrast that number with the unemployment rate back then of 4.4%. In addition, the growth in the non-participation population has been 32% while the population in total has grown 17%.

The increase in the lack of participation does itself have consequences. In particular, I want to look at federal tax revenues. Individual income taxes plus corporate income taxes combine to be called federal funds or general revenues. When you hear talk about Congress working on appropriations, they are working on spending federal funds. For this analysis, I will look at individual income taxes only. Between 2000 and 2013, individual income taxes rose from 1,004,462 to 1,316,405 (in millions of dollars). That might be a confusing number since we are multiplying millions by millions. That 2013 number is 1.316 trillion dollars.

What would it be though if those 10,520,000 missing participants were working? Let’s step through this. The median individual income in 2010 was $26,197 (this is the most recent figure from the Census Bureau). Multiplying those two numbers yields $275.6 billion. If the tax rate was 27%, the additional individual income taxes collected would be $74.4 billion (I recognize 27% might be a high number for an individual working at the median income, but some of these will be second incomes to households and they could see a higher rate than 27%).

Comparing 2013 tax revenues to 2000 tax revenues shows a 31% increase. Adding in the lost potential revenue would show a 38% increase. There are twenty-one agencies that would be funded by this additional revenue. This dollar figure is so large it could fund one of sixteen agencies in full (some agencies are so small, the lost funds could support more than one at 100%). The second conclusion to reach is the lost revenue might seem small compared to total revenue, but it would have a big impact on the federal budget and the appropriations process.

In conclusion, a decrease in the participation rate from 67.0% to 62.7% has caused a lost revenue figure of $74.4 billion in 2013. The next consequence to examine would be the impact social service programs from the increase in the non-participation population. Maybe I’ll get to that someday.

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Author: dmcnic

Educated as an economist, I now work as an Analytical Professional for a manufacturing firm. I have have a second job as a part-time lecturer at the University of Washington in Bothell. While all baseball interests me, the Mariners are my home town team. Married with one dog.

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