Yesterday in comments I wrote the following:
Old demographic argument: the Baby Boomers’ retiring explains the decreasing labor force participation rate
New demographic argument: people aged 20-24 staying in school longer explains the decreasing labor force participation rate
I actually think there’s a kernel of truth in each of those explanation but even in combination they don’t fully explain the decrease in the LFPR.
Similarly, there’s a kernel of truth in automation as an explanation for sluggish job growth but it doesn’t explain most of it.
My candidates for additional factors: low wages for the jobs being created (immigration contributes to this), extension of benefits, multiple job families, Chinese currency manipulation, underwater on houses, taking care of elderly parents, “sticky wages†across too broad a swathe of the economy (I’m working on a post on this one), and uncertainty.
A couple of days ago in the Washington Post, an article sounded similar themes:
Perplexingly, the driving force behind the decline does not appear to be baby boomers beginning to retire, an event economists have long predicted would shrink the size of the workforce. It’s people in the prime of their working years, ages 25 to 54, who began tumbling out of the job market in the early 2000s and have continued to disappear during the recovery.
[…]
“Prime-aged people are working less, and we don’t know why,†said Betsey Stevenson, a labor economist and associate professor at the University of Michigan. “I get concerned because there are a lot of people who have useful and productive skills that could really contribute to the economy, and we’re just failing to find ways to get them involved.â€
The easiest explanation for vanishing prime-aged workers is the weak job market: The economy just isn’t creating enough new jobs to keep job-seekers engaged, so many of them are getting frustrated and abandoning their search for work.
People respond to the incentives they have. That’s true whether you’re a lender, a borrower, or somebody deciding whether to enter the job market. If you don’t believe (with good justification) that you’ll find a job or, at least, a job that’s worth doing, you might elect to get more education in the hopes that a few years down the road with a bit more education under your belt you might be able to land something better. The king may die, the donkey may die, etc.
As a thought experiment let’s brainstorm one of the explanations for slow job growth: automation. That’s variously expressed as “robots” and “computers”. Let’s consider the evidence that’s actually the major factor. I’ve wracked my brain and I can only come up with two supporting arguments:
- Job growth has been sluggish for the last decade.
- Automation has reduced the number of menial jobs, high-paying repetitive jobs, and even clerical jobs.
In this exercise rather than criticizing the hypothesis let’s try to come up with supporting evidence.
Have we reached the point where work has become obsolete?
I’m skeptical of there being much in terms of the demographic arguments. The chart I linked to yesterday indicated that the job participation rate for those over 55 was the only age cohort whose labor participation had increased since 2008. Also, I think Dave did a very detailed series of posts a couple of years ago that showed that the Baby Boomers were entering retirement age having made more, spent more, saved less and owed more on their homes. Those were long-trends that would predict that Baby Boomers will not retire as early, particularly with low interest rates.
As to staying in school longer, College Enrollment shrank in 2011 for the first time in 15 years. I’ve seen a few stories about how education has been particularly hit hard by declines. Law school enrollments have been declining for two years.
I would also add off the books workers to your list. That would include, but not be limited to, illegals. I would bet that the number of menial jobs has actually increased (restaurants, health care), but that the big loss is in mid range jobs.
Steve
For automation, I would look at the long-term US labor participation rate by gender. That shows male labor participation has been dropping steadily since the 50s, but its been offset until the last decade by increased female labor participation.
The long story appears to be male job losses in manufacturing due to automation, while women until recently have readily found jobs in education and health services without risk from automation.
The one thing that bothers me about the above graph is that it shows LFPR at 59% in 1950, and peaking at 66% in 2008. Its down to 63.3% in March. Perhaps that’s normal?
Labor force participation never recovered from the dot com crash, falling to 66% by 2003, where it remained until 2009 and thereafter resumed its deterioration. Participation rates peaked at a little over 67% during the Clinton Boom.
To create sufficient jobs to significantly reduce unemployment real GDP growth must be faster than the sum of labor force growth and productivity growth. This has not happened in a sustained fashion in the U.S. for a decade, most noticeably in the four years since the GFC. The proximity of the starts in decline of labor force participation to cyclical downturns indicates the failure to engender sufficient real GDP growth is a primary cause. People are dropping out because the failure to find employment is exceedingly stressful and the economy is not growing rapidly enough to provide relief.
The decline is an indicator that our economy is in sorry shape and getting worse.
I know this will get a rise, but its a variant of #2. Yes, “menial jobs” (hate that word and concept) can be automated. But talk to any business owner, the costs of employment are going up, and the worker has a safety net approaching Europe. Why work when you get a significant check?
Problem is, “significant” when you are 23 isn’t significant when you wake up and you are 30.
Drew, productivity is often outpacing or matching real GDP growth without factoring in growth in the labor force. That alone is solid evidence technology changes are playing a strong role currently in failure of labor markets to recover. We are not generating sufficient jobs to employ people.