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Wednesday, December 07, 2011

Demographic Shift?

Tim Duy:

Demographic Shift?, by Tim Duy: Bloomberg appears to attribute the drop in the labor force participation rate to retiring baby-boomers:

The drop in U.S. unemployment so far this year may be an early glimpse of what’s to come as the workforce ages...

...At play is a decline in the share of the working-age population, known as the participation rate, meaning that the economy needs to create fewer jobs to bring down unemployment. While some of the decrease has been caused by discouraged workers dropping out of the labor force, another driver is that the baby-boom generation is starting to move into retirement, according to economist Dean Maki.

“Demographic forces are the single biggest factor pushing the participation rate down,” said Maki, chief U.S. economist at Barclays Capital Inc. in New York and a former economist at the Federal Reserve. “This is a bit of a slow-moving drama but it’s likely to become more important in coming years.”

I think it is important to focus on the "slow-moving drama" part, otherwise the problem with this story is the facts. Labor force participation rates of the 65 and older group:


Note that labor force participation rates begin to rise at the end of the last decade, after the collapse of the internet bubble. It seems that this event, not to mention the subsequent rise and fall of housing markets, played havoc with retirement plans. Many who thought they could retire suddenly realized they couldn't afford retirement, and were stuck working longer than anticipated.

A little more support for Maki's case can be found in near-retirees:


I looks like labor force participation rates in this group might be topping out, but not enough to be the "single biggest factor" pushing rate down. To get to that story, you need to go lower on the demographic ladder:


That looks like a pretty dramatic shift to me - 23 percentage points or so. Too be sure, the intermediate group has also declined:


Given the wide range of ages in this group, it is difficult to apply all of the deterioration to the baby-boomers. Looking across the data, we very much see young people fleeing the labor market. To where? Given the weak labor market this decade, the opportunity cost of education is low, and thus many are continuing their education. Interestingly, Karl Smith looks at the data and concludes:

The United States is becoming more educated faster than the economy would absorb educated workers.

Presumably, this is good in the lon-run, as eventually those more educated workers will be absorbed by the labor market. Here I would caution, however, that defining educated or high-skilled workers as those with college degrees may be too-broad a classification. I sense the college-educated population is much more heterogeneous than commonly believed, and in reality contains a mix of high- and low-skilled workers. In other words, just because we are pushing people through the hoops that lead to a college education does not guarantee that those students have gathered skills marketable in the real world. Which means that we don't really know if we are creating "educated" workers faster than the economy can absorb. We could simply be overestimating the number of "educated" workers.

I think the article would have felt better if it began not with the impression that baby boomers are the driving force behind recent declines in the participation rate, but could be more of an influence in over time. This, I sense, is what Maki really wants to say:

The effect of the baby-boomer exit from the labor force will become more evident in the coming decade, Maki said. The policy implications may be more pressing, as Fed officials keep interest rates near record low levels for longer than may be required given the likely drop in the jobless rate. That may fuel price pressures in the economy, he said.

Then again, maybe not:

“It means there is less slack in the economy than is commonly perceived, and the slack will diminish more quickly than people think,” Maki said. As a result, “there are more inflationary risks with the very accommodative monetary policy we have now than one might believe.”

I think the near-term reality is a little less dire. And the article eventually gets there:

To be sure, the outlook for jobs may brighten as the economic expansion develops, drawing more people back into the workforce and limiting declines in unemployment. In addition, some economists argue that retiring baby boomers may not be the best explanation for the decrease already in train in the participation rate.

“Demographic trends are pushing down, over time, the normal labor force participation rate,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. Nonetheless, he said, “the speed of the decline seen this year is in excess of what one would expect just given the demographic trend.”

A much more measured analysis, one I think consistent with the data. Too bad it wasn't the central point of the story. Yes, demographic shifts are likely to put downward pressure on labor force participation rates. But the tendency for those 65 and older to work longer than expected pushes in the other direction. Moreover, an improving economy would also increase labor force participation, especially among younger workers. Simply put, the aging of the baby boomers is just one of many factors currently influencing labor force participation rates and, by extension, the amount of slack in the labor markets.

    Posted by on Wednesday, December 7, 2011 at 12:24 AM in Economics, Fed Watch | Permalink  Comments (77)


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