Why Is the LFPR Declining?

Evan Soltas has a very interesting post that examines why the labor force participation rate is declining. After some math and pseudo-math, here’s what he finds:

The headline result is that 1.7 percentage points of the decline in the labor force participation rate are explained by changes in the demographic composition of the population, and that 1.1 percentage points are left unexplained. The 95-percent confidence intervals on those figures are that between 1.4 and 1.9 percentage points are explained and between 0.8 and 1.4 percentage points are unexplained.

Note that “demographic composition” has more than one component. It includes both Baby Boomers who he presumes are retiring and young workers who are seeking more education.

He mentions one shortcoming of the analysis in his concluding observations: he only examines a very small period. Commenters point out several technical issues with his analysis. I’ll point out some others. Although he recognizes the endogeneity of young workers seeking more education as a factor:

Another concern is the obvious endogeneity problem with education. That is, if the economy’s terrible, that affects your decision of whether to work now or to go back to school. But note that this problem is insoluble without a model of how the economy affects education decisions, something well beyond the scope of my work here. What my work suggests, though, is that this exercise is worthwhile. Since you get a year older every year, there’s not a lot of mystery to the aging-working link. But, since we know now that education decisions were actually important to driving down overall labor force participation, maybe we should go back and think about it carefully.

i.e. conditions other than age, e.g. the state of the economy, affect whether young workers seek more education or not. However, he fails to recognize that the same is true of older workers leaving the workforce: that, too, is not strictly exogenous.

Another issue is that although lives births and people who live to turn 65 are frequently thought of as smooth and continuous they aren’t. That wouldn’t be an issue if he were considering a longer timeframe but, since he’s only considering a couple of months, noise in the underlying data could be significant.

That aside note that the amount he attributes to older workers leaving the workforce is just about the same as the amount he considers unexplained. In other words Baby Boomers retiring doesn’t explain the decline in the LFPR. It probably explains less than half of it.

Here are probably his most important findings:

And what just straight up doesn’t matter? Changes in the share of people on welfare, disability aside. Changes in health, after accounting for disability and age. Changes in the sex and race composition of the labor force.

Overall it makes for interesting reading, especially if you’re math-oriented.

In the final analysis I believe that wondering too much about why the LFPR is declining is misdirection. Whatever the reason, it’s declining and that has implications. Among those implications are lowered tax revenues, reduced income for many people, and less economic activity in general.

10 comments… add one
  • Ben Wolf

    To predict whether or not each of these people are in the labor force, I had data on lots of different things: their age, sex, race, marital status, health status, disability status, education, whether they are currently enrolled in school, whether they’re a war veteran, whether they have young children at home, and whether they’re on welfare.

    This is the sort of thing which troubles me in economics. How is he aggregating qualitative data in quantitative matrices? What metric enables a coefficient for “war veteran?” He’s clearly proud that such abstractions are “standard” for economists, but what good are they if they demonstrate no useful application, particularly when we can see from his own chart the sharp downward trend which began in tandem with the worst recession in eighty years.

    And yet he argues a recovery which after six years hasn’t begun for most of the country is a minor part of the problem?

  • mike shupp

    I’m noticing the LFPR was rising from say 1970 on, but sort of topped off in the early 90’s and really began to slide after 2000 or so. And I’m reminded of an odd little tale.

    There was a recession back about 1991-92 or so, and kind of an odd one in that it hit management almost as badly as shop floor types. Lots of middle managers and lower level supervisors took it in the neck, and for most of them it was a new experience — it was the damned workers who were supposed to lose jobs when times were bad, not their bosses! But it happened. And a decade later, just about when the Dot-Com boom turned to bust, Business Week went back to interview people again who’d been mentioned in their pages before, and did a few more surveys, and were greatly surprised to discover that virtually none of those fallen managers had climbed back into the heights. If you were say a Regional Manager for Sales and lost your job, you probably wound up in something like sales at half your previous pay, and you never got that high up the greasy pole again. Engineering, Autos, Finance, all down the line. the same kind of results; former managers didn’t get back to the same level of responsibility, or anywhere close to the same level of pay. This despite the fact that the Clinton years had generally been pretty good for workers.

    So my thought is, about 1990 a host of people who’d been happy, productive workers — the sort you want to have around forever –began to see that job success wasn’t inevitable, wasn’t long lasting, wasn’t to be trusted, and maybe came with undesirable side effects. Events lowered their morale, in other words, and as soon as they could afford it, they baled.

    Repeat in 2001. Repeat in 2008. Repeat in ?

  • There was a recession back about 1991-92 or so

    My opinion is that our structural problems began around 1993.

  • ...

    Looking for the survey Mike Shupp mentioned I found this:

    Executive Pay: Time For Restraint

    Dated May 5, 1991. Doesn’t look like they had any impact.

  • Guarneri

    I entered the workforce in the early 80’s. Middle to upper management lost jobs right and left. I don’t know where this notion that it was only “shop floor” workers until 1990-1991 comes from.

    Separately, zerohedge has a number of citations today that would tend to bolster Dave’s concern that the economy is following a historical pattern and getting long in the tooth.

  • zerohedge has a number of citations today that would tend to bolster Dave’s concern

    I wonder what rationalization they’ll use when April’s growth is no better than March’s? We might want to start a pool.

  • Guarneri

    “I wonder what rationalization they’ll use when April’s growth is no better than March’s?”

    Racist Republican’s funded by the Koch brothers distracting consumers with Benghazi and Obamacare trying to poison Obama’s presidency…………….or maybe global warming. I’ll put a chip down on each.

    sorry 😉

  • ...

    The pool only works if you break it out by party. All the Republicans I know are saying the reason unemployment is so high is because all of us unemployed people are living high on the hog on EBT cards and unemployment compensation, which of course never ends. So they’ll blame it on poor people.

    But Dems? Guarneri has that well covered.

  • Guarneri

    “Guarneri has that well covered.”

    Actually not. I’m thinking GWB, the War on Women and Fox News are also the cause, plus a minimum wage that’s too low. But I wanted to leave some for the next batters. Is this enough to set up brackets?

    Come to think of it, raise the minimum wage by $2 an hour and it would be all clover and roses. Of course if we thought outside the box we’d probably conclude the problem actually is the lack of iron ore boats coming down from Minnesota. We could ask Menzie Chin, but I already know his answer: Scott Walker.

  • ...

    Actually not. I’m thinking GWB, the War on Women and Fox News are also the cause, plus a minimum wage that’s too low. But I wanted to leave some for the next batters. Is this enough to set up brackets?

    Okay, you’re right. I blame my lack of imagination on this to exhaustion from the yard work earlier today. It was a welcome relief when my daughter started going after me with her squirt guns. (Everyone should be well-armed in this neighborhood.)

    Also, Republicans sometimes blame Obama, though lately they just really seem to hate anyone that isn’t in the upper-two income quintiles. Shockingly, they’re mystified why poor people didn’t vote for them in 2012.

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