The proportion of adults in the labor force is dropping in Minnesota and the nation as a whole. That raises a host of questions. Is this a bad sign for our economy? Is it an effect of the economic slowdown or a cause? Is this trend likely to change in the future?
You first need to understand the indicator in question, something called the “labor force participation rate.” Like the unemployment rate, also tabulated by the same bureau of the Labor Department, the LFPR is strictly defined and often misunderstood.
Start with everyone in the country who is 16 or older. Then subtract everyone in the uniformed services. Then subtract anyone who is “institutionalized,” largely people in prison or mental institutions. What is left is the “civilian noninstitutionalized population 16 and over.”
Everyone in this group is then assigned to one of two categories. They are either “in the labor force” or “not in the labor force.” The labor force is further divided in two. Work for someone else or in your own business and you are “considered “employed.” If you don’t work for someone else or in your own business but actively try to get such work, you are deemed “unemployed.”
Everyone else is categorized as “out of the labor force.” The “labor force participation rate” is the labor force — the employed plus the unemployed — divided by the civilian, non-institutionalized population age 16 and over.
For the country as a whole in the post-World War II era, the LFPR rose from a low of 58.1 percent in 1954 to a high of 67.3 percent in 2000. It since has declined to 64.2 percent last month.
Minnesota’s participation rates have long been higher than those of the nation. The overall rate peaked at 76.1percent in 2001, with men at 81.4 percent and women at 70.9 percent. By 2010, this had fallen to 72.1 percent for all workers, 76 percent for men and 66.9 percent for women. If the rate had stayed at its 2001 peak, there would be 210,000 more people in Minnesota’s labor force than we have now.
That prompts two more questions: Why aren’t these people still in the labor force? And if they were, would they actually have jobs or would they be unemployed?
The second question partially answers the first. Some of the people currently categorized as out of the labor force would prefer to be in it and to be employed. They may have lost jobs and might want to have one, but they do not meet the Bureau of Labor Statistics official criteria for being unemployed.
These are the much-discussed “discouraged workers” whose numbers rise during periods of high unemployment. They, together with “marginally attached workers,” would add 1.6 percentage points to the official U.S. unemployment rate of 8.9 percent in February.
But for Minnesota, this is not a major factor. Our state’s overall LFPR in 2006, the last full year before the economy started to tank, was 72.9 percent. In January, it was 71.1 percent. So the recession explains only a fraction of the 5-point drop since 2001.
One explanation for the rest is increasing retirements. The biggest reason adults do not participate in the labor force is that they retire. The full weight of the baby boom retirement has yet to hit, but Minnesota’s population is aging, and those over 62 or 65 are a somewhat higher percentage of total adults than they were a decade ago. All other things being equal, this factor will further depress the LFPR over the next two decades. (By 2031, the youngest baby boomer will be 67, the now-specified age for that cohort to get full Social Security benefits.)
Some retirements over the past three years have been people who still would prefer to be employed but who began to collect Social Security for lack of other income options. This is why in 2010 outflows from the Social Security trust fund exceeded inflows for the first time, seven years before that had been projected.
Some change took place at the other end of the age spectrum. Labor force participation by workers ages 16-19 was near 70 percent in 2000 but dropped below 60 percent by 2006, before the recession. It was 51.3 percent in 2010. The reasons for this drop are unclear.
The population in this age range is 262,000, of which 106,000 had jobs, 28,000 were unemployed and the remaining 128,000 were “out of the labor force.”
There are other possible reasons people started dropping out of the labor force a decade ago and why the trend has continued. Perhaps some earned so much in the dot-com boom that they no longer needed to work. Perhaps there has been a shift in cultural norms. Teasing this all out takes detailed research.
Increasing retirements by baby boomers, all other things equal, will further decrease participation rates, although the absolute number of people working will not necessarily decline if the population continues to increase. But unless productivity rises, the smaller fraction of the population remaining in the labor force will be pressed to continue producing as many goods and services per person in the population as now. That is another way of saying that living standards will drop.
One constantly hears baby boomers moaning that, because of declines in the value of their retirement funds, they will have to work into their 70s. That hasn’t shown up in the numbers yet, but if it is as true as some assert, participation rates may well rise again in a few years.
© 2011 Edward Lotterman
Chanarambie Consulting, Inc.