Chicago Fed Blames Baby Boomers For Drop In Labor Force

Published: Feb 02, 2012

By Michael S. Derby
A DOW JONES NEWSWIRES COLUMN


NEW YORK (Dow Jones)--The long-running decline in the proportion of Americans still tied to the labor force relative to the nation's total population has been vexing economists and government officials for some time.

They worry the sharp decline in what is called the labor-force-participation rate is a sign overall economic conditions have become so unfavorable many people are simply dropping out of looking for formal work altogether. Against that uncertainty, new research from the Federal Reserve Bank of Chicago argues half of the decline in the labor-force-participation rate over roughly the last decade is a demographic story rather than an economic one.

In a paper published Wednesday, staff economists Daniel Aaronson, Jonathan Davis and Luojia Hu state the retirement of the baby boomer generation is a major driver of the decline in this measure of economic health. Given the source of this downward pressure, it is unlikely labor-force-participation rates will regain past heights.

"Just under half of the post-1999 decline in the U.S. labor force participation rate...can be explained by long-running demographic patterns, such as the retirement of baby boomers," the authors wrote.

In the paper, the researchers flag that following a peak of 67.3% in early 2000, the labor-force-participation rate fell to 64.0% in December 2011. They say the decline is twice as large as any other similar retreat in the post-World War II period. The current labor-force-participation rate mirrors what was last seen in the late 1970s and early 1980s, also times of high unemployment.

Given that falling rates are driven by baby boomer retirements, future labor-force-participation rates likely will be lower than they would otherwise be. The paper said in eight years, with all things being equal, the labor-force-participation rate likely will be around 65.4%.

This matters to economists and policymakers because the balance between those working or seeking work, versus those who have no desire or need to work, determines a lot about the economy's long-term performance. Perhaps most importantly, understanding the labor-force-participation rate plays an important role in gauging the nation's inflation dynamics.

A correct read on the participation rate helps economists make sense of monthly unemployment-rate data. For example, a falling unemployment rate generated by a drop in the labor-force-participation rate is not the good number it seems. At the same time, a rise in the unemployment rate generated by an increase in the labor participation rate may actually be a good thing, because it could signal more prospective workers see a better chance of getting hired due to improved economic conditions.

The paper's authors argue "standard labor market measures used to compute gaps in resource utilization, such as the employment-to-population ratio and the [labor-force-participation rate], should reflect these long-running patterns."

(Michael S. Derby, a special writer with Dow Jones Newswires, has covered the Federal Reserve since 2001. He also writes about bond markets and the economy, and can be reached at 212 416 2214 or via email: michael.derby@dowjones.com)