Most of the drop in the labour force participation rate is caused by demographics

The labour force participation rate is the percentage of Americans over the age of 16 that are either working or looking for work. The rate has been mostly dropping since the turn of the millennium, with a dramatic acceleration during and after the Great Recession. For the last few months it’s seen some slow improvement.

Part of that decline has been due to difficult economic conditions after the financial crisis of 2008, but part of it is also due to simple demographics: The baby boomers are hitting retirement age, and young people are more likely to go to college or graduate school, meaning that fewer people will want to work.

Deutsche Bank chief US economist Joseph LaVorgna wrote about the demographics of the labour force participation drop in a note to clients. LaVorgna and his colleagues came up with a hypothetical model of labour force participation to capture demographic vs. non-demographic factors.

They broke the adult US population up into 13 different age groups, and then projected what the overall labour force participation rate would have been if each of those age groups had the same participation rates that they did in December 2007, right before the start of the recession. Any drop in the participation rate in this model, then, would come only from the changing sizes of the different age groups based on demographic shifts, and not any other factors.

LaVorgna found that demographics really was a big part of the drop. In their model, “participation would have declined from 66.0% as of December 2007 to 64.0% as of February 2016, about 1.1 percentage points above the actual participation rate. In other words, demographics alone have shaved two percentage points off participation, as the large baby boomer generation started to reach retirement age around the start of the recession.” (emphasis theirs)

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