The aging of the U.S. population, cyclical factors related to the Great Recession and a mysterious third factor seem to be behind the widely discussed decline in the labor force participation rate, according to the White House Council of Economic Advisors.
Writing on economic research site Vox, the economists who advise President Barack Obama—Steven Braun, John Coglianese, Jason Furman and Betsey Stevenson—together with Harvard University’s Jim Stock, lay out their data and analysis to explain a trend that some critics have blamed on Obama’s policies.
“In part due to the vigorous, multi-front response to the economic crisis,” the White House team opens, “the U.S. has enjoyed a sustained economic recovery that has exceeded most contemporaneous and historical financial crisis benchmarks.”
Continuing to place the problem of low labor participation in context, they add:
“Up until a year ago, the unemployment rate was falling by an average of 0.7 percentage points per year, roughly tracking the more successful historical experiences, and well exceeding the norm following a financial crisis. In the past year, the pace of the decline in the unemployment rate has doubled.”
The problem of declining labor force participation, they write, pre-dated the financial crisis, and indeed, was predicted.
They cite, for example, a 2006 Brookings Institution paper that forecast labor force participation would decline three percentage points to 62.9% in 2014—exactly today’s rate.
The White House economists further contextualize the sharp 3 percentage-point decline since the fourth quarter of 2007 by noting that a four-decade surge in female participation in the workforce began to plateau in the late 1990s.
But the key turning point was 2008. Though “better known for the global financial crisis, it was also the beginning of a U.S. retirement boom as the first baby boomers (born in 1946) turned age 62 and became eligible for Social Security benefits,” they write, adding that “this decline, however, was amplified by the recession.”
To estimate the impact of this demographic change, the White House economists “hold constant the age-participation profile in 2007 and weight it alternatively with age weights as of 2007Q4 and 2014Q2,” ignoring other economic changes.
They thus calculate that aging accounted for 1.7%, or about half, the decline in workforce participation.
They next examine cyclical factors that are experienced in every recession. Just as a booming economy is usually accompanied by a rising participation rate, a lagging economy sees workforce participation fall below trend.
The White House team, after explaining their technique for calculating the effect of a lagging economy, said they “estimate that between 2007Q4 and the present, business cycle effects alone explain 0.5 percentage points (about one sixth) of the total fall in the participation rate.”
The economists are now most of the way toward explaining the labor force decline, but some third of the decline—0.9 percentage points—remain unexplained. This “residual,” they say, seems to have emerged in the past two years.
The team offers several possible explanations.
First, they say, there has been a long-term decline in the workforce participation of prime-age men occurring since the 1950s and a smaller decline in the labor participation of women since the late 1990s.
But since the residual has only become recently apparent, the White House team posits that the third factor may have something to do with the Great Recession.
They tested three variables—“the school enrollment rate, the Social Security disability insurance claimant rate, and the mean duration of unemployment.”
Of these three factors, only the last one involving longer spells of joblessness proved “quantitatively large and statistically significant.”
Their finding is not conclusive, but “it is consistent with a large body of work that points to the corrosive effect of long-term unemployment on the ability of workers to find work and reintegrate into the labor market,” they write.
Going forward, the White House economic advisors expect the participation rate to hold steady in the coming years as employment picks up, then continue its decline as “aging effects once again dominate.”
While maximizing the labor force participation rate is not a goal of public policy, the White House advisors write, the issue assumes importance in terms of GDP growth and fiscal sustainability, particularly “the rate of return of pay-as-you-go systems.”
One possible amelioration of the problem would be immigration reform, they say, citing Congressional Budget Office estimates that such reform would add 6 million workers by 2023, thus raising the labor participation rate by 0.7%.
The White House team cite pay discrimination against women as a factor they say suppresses female labor force participation and add a call for more family-friendly policies.
Related on ThinkAdvisor: