And none of it was unexpected because, baby boomer retirements.
Quote:Baby Boomers' Impact on Participation Rate Big, Expected
Retirements account for nearly half of the fall in the participation rate, a White House report shows.
By Katherine Peralta | Staff Writer July 17, 2014, at 5:18 p.m.
Aging baby boomers, those Americans born between 1946 and 1964, account for approximately half of the drop in the labor force participation rate since 2007, according to a report released Thursday from the White House Council of Economic Advisers. The remaining decline stems from “cyclical factors” fairly typical of historic economic recessions and more difficult-to-explain “residual factors” from the crisis.
The participate rate, which is the portion of adults employed or looking for a job, is “one of the most puzzling and for many people [most] misunderstood parts of the labor market,” according to Jason Furman, chairman of the Council of Economic Advisers and a co-author of the report.
At 62.8 percent, it is the lowest it’s been since 1978 and has fallen 3.1 percentage points since 2007, a year before the oldest baby boomers turned 62 and become eligible for early Social Security benefits. Baby boomers' retiring accounts for about 1.6 percentage points of the fall.
Graph showing the labor force particapation rate from 1948 until 2014.
Courtesy of White House Council of Economic Advisers
While older adults participate more in the labor market now more than previous generations, both men and women decrease their participation by at least 40 percentage points in the decade leading up to age 65, the report showed.
This trend will continue, as the Social Security Administration predicts that by 2029 about a quarter of the population will be at or above retirement age.
“We wouldn’t expect the participation rate to return to its pre-crisis levels and in fact, we weren’t expecting that even prior to the crisis,” Furman said at a forum on labor market challenges hosted by the Brookings Institution’s Hamilton Project Thursday in Washington.
The participation rate started rising in the early 60s as women entered the labor force and later as baby boomers hit their prime working ages, reached a peak of 67 percent in 2000 and since then has generally fallen. It’s been dragged down by a leveling off of female participation, the retirements of baby boomers and shocks of the financial crisis.
[ALSO: Elderly Workforce Participation Rate Strong While Overall Rate Weakens]
With improvement of the labor market, the cyclical drag on the participation rate should wane, the report showed. Since 2007 through the second quarter of this year, it has accounted for about 0.5 percentage points of the total participation rate fall.
When an economy operates “below its full potential,” participation falls and unemployment rises. This is typical of economic downturns, yet the most recent crisis was especially severe and has resulted in a bigger constraint on participation.
Graph showing the decline in labor force participation from 2009 to 2014.
Courtesy of White House Council of Economic Advisers
The residual effects that the other declines in participation can’t account for are the decline for prime-age working men – those 25 to 54 – since the 1950s and for prime-age working women since the 1990s. This “residual” portion also includes the share of long-term unemployed and makes up about 1 percentage point of the total decline, or about a third.
A notable drag on the declining overall male participation is black male participation, which has fallen more than 10 percentage points since the mid 1970s. This drop has been consistent across all education levels. During the past decade, the rise in incarceration of young black men has deteriorated participation even further, and jail time weakens later employment prospects.
“There’s an old saying that the best anti-poverty program is a job,” Furman said. “One important lesson looking at this economic recovery is that when you are strengthening the overall economy, you are bringing the unemployment rate down for everyone at roughly the same pace.”
The residual 1 percentage point is “a very, very big deal” that shouldn’t be ignored from a policy standpoint, said economist Alan Blinder, a professor at Princeton University and former Fed vice chairman who also served on Bill Clinton’s Council of Economic Advisers.
Family-friendly policy changes noted in the report include paid and sick leave, high quality day care and support for part-time work. The absence of such policies in the U.S. could explain about a quarter of the decline in women’s participation between 1990 and 2010.
As more people start filling open job positions, the unemployment rate declines and participation rises – therefore removing so-called “slack” in the labor market – the economy will reach full employment.
Blinder says this could be when the unemployment rate falls to 5.25 or 5.5 percent, down from its current 6.1 percent. This would put downward pressure on wages, providing a boost to low-income individuals.
Besides the fact U.S. businesses have added 1.4 million jobs this year, the best six months since 1990, Furman said, a full recovery is “not there yet.”
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