Bank of America economist Michelle Mayer has put out a long, new note one of the more controversial subjects in economics these days: The labour Force Participation Rate.
The Unemployment Rate has been grinding down, but everyone has noticed that labour Force Participation has dropped as well, and it’s been argued that the exodus of people from the workforce (who no longer count as unemployed when they’re not working) undermine the idea of workforce improvement.
Mayer’s note comes down firmly on the side of saying that the decline in labour Force Participation is largely secular, and not primarily about the economic malaise.
We can isolate the effect of demographics on the LFPR by looking at the participation rates by age cohort. The aggregate LFPR is equal to the summation of each individual age cohort’s LFPR weighted by its share of the population. As a result, we can determine the impact of the change in population share by fixing the LFPR for each age cohort at pre-recession levels. This suggests that half of the 2.7pp decline in the LFPR since the onset of the recession can be explained simply from the ageing population. In other words, holding all else equal – meaning no business cycle dynamics – the LFPR would be at 64.6% today compared to the actual rate of 63.3%. The remaining 1.4pp drop is due to somecombination of secular and short-term cyclical factors.
Here’s a chart showing actual labour Force Participation Rate vs. the projected rate merely based on demographic changes.
BaMLThe remaining gap is partly due to the weak economy (people giving up) and partly due to other secular factors, such as young people being more inclined to be in shool and not work.
Long-term, here’s what BofAML expects based on demographics.