Friday, August 16, 2013

It's All Demographics, Again

I took the census middle series population forecast by age & sex and I fit these very basic labor force participation trends to them:

The middle age groups follow pretty stable long term trends.  I gave the young age group a level trend, although it doesn't seem to matter much.  And, I projected for the 65+ group to have a pretty aggressive uptrend for the next 50 years.  Here's what the LFPR would be for the total labor force:

Here is the forecast, appended to actual past LFP rates (in blue):

The most important thing to note here is that the current slope of the line basically tracks the slope we have seen since 2000.  You don't need a disillusioned labor force that's given up in order to explain this decline.

There are periods in the late 70's, late 80's, late 90's, and mid-oughts, where LFP goes above trend during especially strong labor markets.  The sharp curvature of the curve makes it hard to see these, but once we correct for this trend, there is nothing special about LFP behavior.

One mistake I see a lot of people making is that they compare the current LFP rate to the rate at the peak of 2007, so they are capturing all of the cyclical variation plus 6 years of a very sharp secular decline.  Because the secular decline started in the late 90's, conventional wisdom also attributes the secular trend in the labor market of the 2002-2007 recovery to a weak recovery.  In truth, the LFP in 2007 was well above trend, and a very strong labor market was masked by demographics.  So the demographic factors here tend to be dismissed as a result of placing errors on top of errors in our analysis.

To show how strong the demographics are as a factor, I tweaked my LFP forecasts so that the 65+ group increases even more aggressively and the other age groups buck their long term trends and level out:

You should note 2 things:
1) This doesn't effect the slope of the line for the next 5 years.
2) Even here, none of us will be seeing 67% LFP again in our lifetimes.

I suspect that those bumps of LFP above trend during the highpoint of the business cycle will become more pronounced as the number of older workers who are semi-retired increases.  That might lead to more pro-cyclical opportunistic labor force participation (in green on the chart above).  Like the last cycle, at it's peak, this will produce a horizontal LFP line that will be interpreted as the new normal, and when the cycle turns sour and the LFP declines to the much lower level, it will be interpreted as another weak recovery that leaves workers behind.  It will be hard to empirically reject this interpretation because there will actually be many discouraged workers, as is typical after a recession.  Only someone totally lacking in social grace would announce during a recession that the labor market isn't as bad as it's made out to be.

I imagine telling my great-great grandparents that in my day, many people are healthy well into their 70's and 80's, and that they are relatively wealthy for all that time, too, even though they stop working by their 60's and don't depend on their children.  (BTW, the male LFP rate for 65+ year olds in 1949 was 47%.) I imagine that their mouths would drop in disbelief.  Is there any news so good that we can't twist it into bad news?


  1. insightful post... thank you for posting. I commented over on marginal revolution but just wanted to say thanks for this analysis.

  2. "I imagine telling my great-great grandparents"


    1. Thanks for the edit, but the original is what I meant to say. I was imagining going back in time to describe the future to them....