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27 May 2012

Retiring Baby Boomers and the Dropping Labor Force Participation Rate

This is a reconsideration of my post entitled Are Retiring Baby Boomers Causing the Labor Force Participation Rate to Drop?   This revised post is the result of some uneasiness I had about my earlier post and the perceptive objection made by a reader, Danny Jeck.

The labor participation rate is the sum of those employed and those actively looking for employment divided by the civilian and non-institutionalized working age population 16 and over.   That ratio is usually expressed as a percentage.  For some historical perspective, the labor participation rate from 1948 to 2008 is shown below:

The labor participation rate for men has fallen steadily since 1948, while that for women grew from 1948 to about 1996 and from then until 2008 was about constant.  The total labor participation rate was quite constant at about 60% from 1948 to 1972.  It then rose until about 1990 and then was nearly constant until about 2001.  Since then the labor force participation rate has fallen.  The fall essentially began with the dot com recession and the labor participation rate never recovered.  More recently, the Great Socialist Recession has caused it to fall more rapidly.

There have been plausible suggestions that a part of the reason for the drop in the labor force participation rate is because the leading edge of the Baby Boomer generation has reached retirement age.  This is an important issue for many reasons, but one of special significance is how much of the drop in the labor participation rate in this never-ending recession is due to discouraged unemployed people no longer looking for employment versus a large number of Baby Boomer retirees.  Let us examine the civilian labor force participation rates provided by the Bureau of Labor Statistics for both young and seasoned workers by age group:

The civilian labor force participation rates for three age groups of young people are shown from 2002 to 2011 for comparison with that for three age groups of seasoned people.  That for the entire civilian labor force 16 years old and up is also shown.  The entire labor force shows a small decrease in its civilian labor participation rate since 2008.

The leading edge of the Baby Boomers is the lower age portion within the 65 - 69 age group, those 65 and 66.  The labor force participation rate for this group has actually been steadily increasing since 2002!  That for the age group 60 - 64 has also generally increased, though it dropped slightly in 2011.  The age group 55 - 59 has been very slightly higher in participation from 2008 through 2011. If the retirements of Baby Boomers are the cause of the falling civilian labor force participation rates, it is not apparent from the participation rates of the seasoned workers most likely to be retiring.

Examining the youngest 16 - 19 year old worker group, we find a sharp fall in the participation rate since 2006.  The labor force participation rate for the 20 - 24 age group has fallen slightly since 2008, while the 25 - 29 age group rate has fallen less since then.  Note that the disastrous fall in the labor force participation rate for the 16 - 19 year old workers began before the Great Socialist Recession began in 2008.  The federal minimum wage went up from $5.15 to $5.85 on 24 July 2007, so many companies would have hired few starting workers in this age group even earlier that year in anticipation of this increase in their labor costs.

It appears likely that the lower overall labor participation rate is thus due more to younger workers than to older workers and that much of that may be due to the federal minimum wage increases in July of 2007, 2008, and 2009.  However, it is still possible that some of the decrease in the labor participation rate is still due to retiring seasoned workers if the per year numbers of Baby Boomers on the leading edge of that generation are in larger numbers than are the young workers entering the labor pipeline.  Let us look at the numbers in the population of each group in 2011:

16 - 19 year olds:  16,774,000, a 4-year group with a 5-year group equivalent of 20,967,500

20 - 24 year olds:  21,423,000

25 - 29 year olds:  21,119,000

55 - 59 year olds:  19,670,000

60 - 64 year olds:  17,317,000

65 - 69 year olds:  12,546,000

There are fewer people in the three older age groups per year than there are in the three young age groups.  In particular, there are fewer people of any age from 55 to 66, which are Baby Boomer years, than there are in the 16, 17, 18, or up to 29 years old individual years.  There are more potential workers entering the employment pipeline than are exiting it.  Unfortunately, those who may wish to enter the pipeline are not being hired.  The primary cause of the labor participation rate is among these younger people.

As I pointed out, a part of the reason is the minimum wage law, which is not always the federal law.  Many states have higher minimum wage rates than the federal rate.  18 states have a higher minimum wage than the federal minimum wage.  These minimum wage mandates greatly discourage employers from hiring many young and inexperienced workers who will need extensive on-the-job training, especially when the worker is under-educated or shows evidence of possible work ethic problems.

Still another important reason for not hiring young workers since 2008 is the knowledge that employers will have to provide expensive health care insurance to young workers as ObamaCare kicks in.  In the past, many young workers were not covered by company health insurance, which gave them an opportunity in their generally healthy youthful years to gain enough skills that an employer would later provide them with health insurance coverage.  Now the expense looms before the knowledge and skill set of the young worker has matured enough to prove his value.

Finally, it costs money, which has to be viewed as an investment, to train a new worker, especially if the worker is young and inexperienced.  Most of the young people hired are hired by small companies.  These small companies often have cash flow problems even in good times and can be especially vulnerable when they have used many of their limited financial resources to weather an extraordinarily long and deep recession of four years duration that looks likely to stretch into a fifth year.

No business cycle recession lasts so long.  Only government knows how to so mangle the economy that our great private sector enterprises cannot recover strongly in much less time.  Much as was the case in the Great Depression, government has pursued very wrongheaded socialist visions which have discouraged business investors, whether they be investors in equipment or in newly hired human capital.

How ironic and tragic that young Americans who were so often enthusiastic about the election of Barack Obama in 2008 have now found themselves and their slightly younger brothers and sisters suffering dire delays in establishing their careers.  Many have lost out on gaining years of job skills and experience.  Obama has betrayed their faith in him on a colossal scale.  Though in truth even young people should have known better than to have embraced his socialism despite the government-run school indoctrination programs in favor of socialism and big government generally.

Let us return to estimating the size of the effect of Baby Boomers on the labor participation rate. From April 2011 to April 2012, the population 65 and older grew by 2,003,000 people. As a percentage of the population 16 and over, they went from 16.51% to 17.09%, an increase of 0.58%. The labor participation rate of those 65 and older increased from 18.0 to 18.5% in this time, or by 567,945 people. The total population of those 16 and over increased by 3,638,000 people, so the number of added people in the 16 through 64 population of 1,635,000 people was smaller than those added to the 65 and over population by 368,000 people.  This will cause the Baby Boomer generation to begin to have a small effect on the labor participation rate.

Back in April 2002, a pretty decent time for jobs, those 16 - 19 years old had a labor participation rate of about 44.3%. So about that % of the 368,000 additional young people who might want to be labor participants is about 163,000 people. The increase in the number of people 65 and older participating in the labor force in the last year was 567,945 people as mentioned, so the seasoned population actually added 3.5 times as many participants as might have wanted to be new participants in the 16 - 64 age group.

This is all interesting, but we also have to acknowledge that from April 2011 to April 2012, the number of non-participants in the labor force 65 and over increased by 1,435,055 people. This number compared to the total non-institutional civilian population 16 and over is 0.59%. That is not an entirely negligible number in terms of the overall labor participation rate.

In 2007 and 2008, the annual labor participation rate was 66.0%.  It fell in 2009 to 65.4%, then fell again in 2010 to 64.7%, and fell still again in 2011 to 64.1%.  The decreases in 2009 and 2010 were mostly due to decreases in the labor force participation of young people.  See Democrats Eat the Young: Minimum Wage Case in Point.  However, the fall from April 2011 to April 2012 in the labor participation rate was from 63.9% to 63.4%, which very nearly matches the 0.59% calculated in the previous paragraph for the effect of the leading edge of Baby Boomers who are now 65 and 66 years old and are not now participating in the labor force.  It seems the effect of the young people on a dropping labor participation rate is now over and that the drop in the rate for the last year has been due to that leading edge of the Baby Boom generation.

We have to imagine that more of the 65 and older population would like to have sufficient job prospects that looking for work would make sense. Perhaps their increasing participation rate is not even as great as it would be if the economy were to come around and start getting better. With the drop in home prices and the widespread losses in their retirement investments, many more people of this age would like to work than have in past years.  I also know from many anecdotal discussions that many leading age Baby Boomers had children relatively late in life and are still struggling to pay off the debts they incurred sending their children to our very much over-priced colleges and universities.  Many such as me have no prospects of stopping work before they are 75 years old.

Clearly, if we assume that Baby Boomers all want to be retired if they are not participating in the labor market, then there is some effect which does not represent a failure of the economy. But I suspect that once one is 65 the market for one's labor starts to look bleak for many, especially when so many people are out of work and many more have dropped out of the labor force. This makes many older people who actually want to work or need to work victims of the poor economy and causes them to drop out in larger numbers than is good for them or for our society.  With people living longer and being generally healthier at age 65 than in the past, it is natural to expect that more older people would like to continue working even in the face of many other people's expectations that they should stop working at that age.  I do not know how to extract this effect, other than to survey them on the question of whether they would like to be working or not.

It is almost certain that as we get more and more of the Baby Boomers past the age of 65, they will start to have an effect on the labor participation rate. As we have seen, they have had an effect in the last year. The effect this coming year will be greater than that of the last year if the effect is entirely due to people wanting to retire as opposed to an economy that cannot provide them with jobs.

As the Baby Boomers come to reach the age of 65 and if the labor force participation rate continues to fall, it will be harder to grow the economy both due to fewer productive workers and higher Medicare and Social Security cost burdens on workers.  Baby Boomers trying to unload the homes they raised children for smaller homes or condominiums, perhaps in warmer climates, in will be driving down the cost of homes.  This will make a recovery in home values following the housing bubble much harder.  The consequences for our economy will be massive, but we have known this was coming for decades.  Knowing that, we still built up our national debt and unfunded liabilities without a care in the world.

Still, there are things that can be done to greatly boost the growth of our economy.  We need to reduce business taxes and the higher tax brackets of the income tax.  We need to reduce industry killing regulations such as those the Obama administration has put on the coal industry.  We sure could use the boost to the economy that allowing more oil and gas drilling on federal land and offshore could provide.  We also need to find ways to allow anyone over 65 years old who wants to work to do so.  The years ahead are going to be very challenging.  To manage them, we had better reign in government by controlling its spending and ending the harm it is doing to our businesses.  The problems brought on by an aging population can be minimized if we come again to believe that the business of America is business.

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