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.