Thursday, December 5, 2013

A Digression on Labor Force Participation

This is the next post in a continuing series.  In order to look at the effects of the minimum wage in the most recent recession, we are going to need to look at trends in Labor Force Participation (LFP) again.  The demographic trends are too strong to leave out of any labor force analysis.

Here is a graph of the actual LFP to the LFP trend:

This trend isn't just a naïve moving average.  I created this trend by tracking population changes within age groups, and applying relatively stable, long-term trends to each age group.  This trend is not effected by any reasonable inflation of the individual trends, because the overwhelming cause of the aggregate trend is the movement of workers into the 55+ and 65+ age groups that have much lower LFP.

Female labor participation peaked in the mid-90's, so that now all of the 25-55 age categories are following long-established, slowly declining trends.  Here are the 20 year trends that I used to formulate the LFP trend line.  The other graph shows the trends in the male-only series, which are similar and quite linear for at least 50 years.

I don't know why so many people refuse to believe that the stasis LFP rate is declining this steeply, but it should be clear as day that there is nothing unusual going on with the age-specific labor force participation trends that I have used to make the trend.  (I have an upcoming post on LFP trend forecasts that the BLS made in 2007).

Following is a graph of the LFP going way back to 1954, compared to a smooth trend.  Now, it is fortunate that all of the trends back to 1993 are so linear, so that it is so easy to see what's happening with the current trend.

But, this isn't the case before 1993.  There are lots of moving parts in the earlier periods involving women, older workers, younger workers, etc.  So, for the earlier period, I did just fit a smooth curve to the actual data.  This isn't important for my purposes here.  My aim for the longer series is to show the typical scale of movements above and below trend.  So, if my trend is not precise at any given point, the trend-adjusted level of the LFP might be off, but the scale of the movement over the course of a business cycle will be basically accurate.

The next graph shows the LFP deviation from trend (the red line, with the left scale).  The blue line (right scale) is the inverted unemployment rate.  The green shadows are periods of initial minimum wage (MW) hikes.  (The combination of high inflation and a series of small MW hikes in the late 1970's makes that period difficult to analyze, so I have not included MW hikes from that period.)

The takeaway here is that LFP tends to move up and down with unemployment, and the scale at which it is moving in the current cycle is not that unusual.

I have found a correlation between minimum wage hikes and drops in LFP.  It isn't easy to see it visually in the graph of aggregate LFP.  But, most of the effect of MW is on young workers.

So, this last graph shows the long term LFP of 16-24 year olds (not de-trended).  And, the correlation between MW hikes and drops in LFP from the trend is more clear here.  The experience of previous MW hikes predicts the large fall in LFP in 2007-2009, focused mainly on young workers.  Next, I expect to show that, once the expected effects of the MW hikes are accounted for, the cyclical LFP declines that remain will be even less sharp.

But, before you look at the next post, go back to the start of this post and look at that chart again, and the trends that feed it.  Anyone that tries to tell you there is some policy-fix or cyclical recovery that is going to pull LFP back up to 65% or higher is simply wrong.  And anyone who says that unemployment would be 11% if not for a cyclical exodus of workers from the labor force is spouting nonsense.  This is very straightforward.

PS.  Here is a closer view of the 20 year trends of the main working ages:

As mentioned above, these slopes are similar to very long term male trends, and all three series follow the pattern of being above trend when the unemployment rate is around 5% or less and being below trend during recessionary periods.

Next: Minimum Wages, 2007-2009 and my estimate of their employment effects.

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