August 25, 2012

2% Drop In Labor Force Participation -- Who Quit Working?

The other day DQYDJ discussed how the employment-population ratio has dropped below 59% and hasn't really been going up.   The cause of that is a drop in the labor force participation rate as well as the changing unemployment rate.   That raised an interesting question in my mind...  Why did the labor force participation rate drop 2%?  

Labor Force Participation (click to enlarge)
For 30 years between 1988 to 2008 the labor force participation rate was about 66% give or take 0.5%.   Between 2008 and 2011 about 2% of the nation dropped out of the labor force.  (see chart to right)  It was a sharp drop which seems related to the recession.   That 2% equates to about 4.5 million people who are not working now  versus 2008 after adjusting for population growth.    In 2008 there were about 233.7M people in the civilian population over 16 years old and 66% of them were in the labor force.   Then in 2011 the population was 239.6M and 64.1% of them were in the labor force.  If we still had 66% participation rate in 2011 then that would equate to +4.5M more people in the labor force versus not.

Most of this data I discuss today is from the A-1 Employment status historical tables from the BLS. 

People in the Labor force versus Not In the Labor Force
The labor force includes people who are employed as well as those who are unemployed.   When you say someone is not participating in the labor force that means they are not employed but they do not wish to be employed or are disgruntled with the labor market enough to not even try to look for work.   So if we totally set aside the unemployed people and look at the people who aren't even in the labor force then theres now 4.5 million more people who simply aren't counted in the labor pool.

I'm going to discuss various groups of the population and how they contributed to the change in the overall labor force participation rate.    The numbers I'm using all come from the BLS.    I'm breaking down the total number of people who dropped out of the labor force and the percent this is of the net change in labor force for the total population.   These groups do have some overlap so the percentages will overlap some, for example I discuss people age 20-24 and then also discuss college students and theres certainly overlap between those groups.

1.3 Million Various Discouraged Workers -- 29%
A large chunk of the additional 4.5 million people who don't participate in the labor pool are in the group who are not in the labor force but who DO want a job.  In fact there are about 1.3 million more of those people now which accounts for about 29% of the total change in labor force participation.   About half of these people have not searched for work for over a year.    About 20% of them are 'discouraged' from the job market.   10% are currently not available to work.   The other 20% are mixed reasons like illness, helping family, returning to school, etc.

Side note :  Unemployed versus Discouraged
Above I discussed 1.3 M people who are not in the labor force yet who want a job.   Now you might ask : "if someone wants a job and doesn't have one then doesn't that mean they are unemployed?"     Well no.    The people who are not in the labor force yet want work are not included in the unemployment figures.    If someone stops looking for work for long enough they are dropped out of the unemployment figures and moved out of the labor force.   The unemployed portion of the labor force are people who are actively hunting for work on a regular basis.   The people who are not counted in the labor force yet who do want work are not actively job hunting.

800k Fewer Teenagers Work -- 18%
Teenager Labor Participation (click to enlarge)
About 18% of the drop in labor force participation is from higher % of teenagers who are not in the labor force.   The % of teenagers (age 16-19) who participate in the labor force has been dropping steadily.   Between 2002 and 2011 their participation rate dropped from 47% to 34%.  (pictured at right)   Thats a much larger change than the general population.   From just 2008 to 2011 the # of non participating teenagers increased 800k.   The total labor force dropped from 66% to about 64% and that equates to around 4 million more people who aren't in the labor force.   The drop in teenager labor force participation doesn't seem like a reaction to the recession alone.  It appears to be a longer term downward trend.

650k in Early Twenties -- 15%
If you look at the age group from 20 to 24 years old they also had a steeper drop in their labor force participation rate.    In 2008 their participation rate was 74.4% and by 2011 it was  down to 71.3%.  Thats a faster drop than the overall population.   About 650 thousand more people age 20-24 were not in the labor force in 2011 versus 2008.   That 650k amounts to about 15% of the total change.    This group had seen decreasing participation in the labor force already.   From 2000 to 2008 the participation dropped from 77.7% to 74.3%.   SO it was already going down about 0.4% a year.   However from 2008 to 2009 it went down 2.7% which is far faster than the existing trend.   This group quit the labor force partially due to existing trends but mostly due to the recession.    I believe a major on this age group is the impact of college enrollment trends.

288k are probably non working College Students -- 6%

Fewer younger people aged 18-24 are working.    We might assume that this could be due to higher college enrollment.   However enrolling in college doesn't necessarily mean you aren't in the labor force.  In fact as of 2011 about 39% of the students in college or high school were in the labor force.  Yet there is a lower labor force participation among college students as compared to people who are not students.   If we look at total college enrollment, I find that in 2008 we had about 18.6M students and then by 2010 it had increased to 20.2M.   2010 is the most recent year I could find data.   As a % of the population that means we went from 8% of adults in college to 8.5%.   This is about 1.1M more students than population growth alone would have caused.   Now if we assume that about 40% of those students are in the labor force then this would result in about 288K fewer people in the labor force due to higher college enrollment.    This 288k would be around 6% of the total drop of 4.5M in labor force participation rates.

Aging population -- 10%
From 2008 to 2011 the number of people over age 65 that are in the population increased.   When we look at labor force figures this increase is amplified since it excludes the children.   Among the population over age 16 the portion who are over age 65 increased from 15.9% in 2008 to 16.6% in 2011.   So over those 4 years thats 0.7% more people who are over 65 among the potential labor pool.   People over age 65 are usually retired and work at much lower rate than the people age 16 to 64 years.   This aging of the population due to the Baby Boomers hitting retirement has contributed to about 0.2% drop in the labor force participation rate.

The Whole Picture

These are the major groups of demographics that I can find data on and try and determine how their individual labor force participation has impacted the entire populations labor force.  

Again, keep in mind that there is overlap between those groups.   I've figured the numbers myself using the BLS  data.   I also tried in general to account for population growth while doing so.

Now lets look at some other demographic factors and how they are or aren't leaving the workforce faster.

More Men then Women -- 63% Men and 37% Women

If you just look at the men over age 16 versus the women over age 16 a much larger number of men dropped out of the work force. 

For men in 2008 the population was 113M and it went up to 116M in 2011.  The percent of men who don't participate in the labor force went from 27% to 29.5%.   Thats a total of 3.75M more men who are not in the workforce.   If the labor force had stayed steady at the 2008 level then we'd have had about 2.88M more men working based on 2011 population.   That 2.88M change is 63% of the total.

For women on the other hand the population grew from 120.6M to 123.3M between '08 and '11.   In '08 we had 40.5% of women who didn't work which went up to 41.9% by 2011.   That is a smaller change then the men.   The total number of women who don't work grew by 2.75M.   If we held the labor force participation rate steady at 2008 levels then with the 2011 population of women we'd have had 1.69M more women working.    That is about 37% of the total.

There are different longer term trends in labor force participation for men and women.   Men have been on a downward trend over time and from 1990 to 2000 the labor force participation rate dropped from 76.3% to 74.6%.   Then from 2000 to 2010 it dropped from 74.6% to 70.8%.   For women on the other hand the labor force was growing in the 90's and it went from 57.4% in 1990 to 59.8% in 2000.  But then it turned around and dropped to 58.4% by 2010.     Both men and women saw a fairly steep drop around 2008-2009.    From 1990 to 2007 the rate dropped an average of 0.19% annually for men.   With the recession from 2008 to 2011 the rate tripled to an annual drop of about 0.6% a year on average.  

Early Retirement is NOT a Factor
One theory about a lower labor force rate might be that older people are dropping out of the workforce early.   If this were true we'd see a larger spike in the change for people around age 55-64.    However, there has been little change in the labor participation rate for people 55 to 64 years old from 2008 to 2011.   For that age group the labor force participation rate went from 64.5% to 64.3%.    Thats much less of a change than the general population group saw so this group actually stayed in the labor force more than other age groups.   While some people might be signing on for social security early rather than continue to job hunt, that is not the overall thread and its not adding to the over all drop in labor force.

Fewer People are Retiring at 65
Over 65 labor force (click to enlarge)
In fact if we look at people age 65 and older their participation rate in the labor force has actually increased by about 1.1% from 2008 to 2011.     In 2008 the participation rate for people over 65 was 17.2% and by 2011 it had grown to 18.3%.   While you might expect this is due to the recession its actually been a trend for over a decade now.  (see graphic at right)    In the 1990's the participation rate for people over 65 years old was around 11-12% with a very slight upward trend, then around the year 2000 it hit 13% and has been going up since then.    Theres no spike around 2008 during the recession, its just a gradual increase over the decade.    This factor actually lessens the impact of the Baby Boomers retiring on the overall labor force participation rate.    If Baby Boomers retired at the same rate as they did in 2008 then there would be about 400 thousand more retirees in that age group and the national labor force participation rate would have been about 0.2% lower than it is.

Change for Disabled People On Par with General Population
One thing I've heard is that more and more people are signing up for disability benefits.   That could explain some people dropping out of the labor force.   However I don't see strong evidence of this.   In fact the BLS data indicates the % of the population with disabilities is down marginally from 2008 to 2011.   In 2008 they counted about 26.9M people with disabilities and by 2011 it was at 27.3M.   However as a percent of the total population the rate went from 11.50% to 11.41%.    But another thing to consider is the labor force participation rate of the disabled population.   Most disabled people do not participate in the labor force.      The % of disabled people who participate in the labor force was about 23% in 2008 and down to 20.7% in 2011.    That 2% change is about the same change we see in the overall population.   The total number of disabled people who don't work went up about 470k after figuring for the population growth.   That amounts to 10% of the total increase which is proportional to the % of the population that is disabled.    The labor rate did not drop due to people switching to disabled status.

Medium Education Hit Worse than College Grads and Dropouts

People with four year college degrees stayed in the labor force a bit more than people with Associates degrees or just a high school diploma.  Interestingly the people with less than high school didn't change much in their labor force participation rate.  But a far lower portion of that group works in general so its not anything for them to be thrilled about.   Here is the comparison of labor force participation rates for people over age 25 in different education attainment levels :

2008 2011 drop
Less than High School 46.9 46.8 -0.1
High School 62.8 60.2 -2.6
Associates 76.1 73.1 -3
College Graduates 77.9 76.1 -1.8

I'm not going to take any guesses about why the trends differed among education groups.   Part of it is probably due to demographics.

Bottom Line :   There are a variety of reasons that the labor force participation has dropped since the recession.   While it may be tempting to attribute it to particular factors like aging Baby Boomers or discouraged workers, its actually a combination of several varying as well as continuation of existing trends.

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