Issues in Brief

A Transitioning Labor Market

Vice President and Chief Economist
April 8, 2014

Need to Know . . .

  • A large part of the recent decline in labor participation comes from the changing age distribution of the population
  • If the participation rate had stayed at the 2007 level, rather than decline, the unemployment rate would now be 2 percentage points higher—8.7% rather than 6.7%
  • In a couple of years, firms should see widespread, tight labor markets

The 2008-09 recession was catastrophic in terms of U.S. job loss and the extended duration of unemployment. While the economy has added 8 million net jobs since December 2009, it will take until approximately June 2014 to get back to the December 2007 jobs level. This aspect of the recovery was slower and more prolonged than for all other recessions in the post-WWII period.

Of note, the potential supply of labor did not stagnate during 2007 to 2013 when the economy lost 8.7 million jobs; instead, the working age population grew 6%—by 13.8 million people—over the period.

Faster Than Expected Decline in the Unemployment Rate
The unemployment rate was 10% in October 2009 and fell to 6.7% in February 2014, and projections put the rate at 5% by the end of 2016. The pace of the decrease is a result of the sharp decline in the labor force participation rate, offsetting the pressure of a continuously growing working age population.

The participation rate for men dropped steadily for decades and fell at an increasing pace with the 2001 and 2008-09 recessions (Figure 1). In the 1980s and 1990s, the participation rate rose briskly for women, when a new generation with greater education and fewer children entered the labor force. For a time, this strong rise more than offset the slow decline in male participation. By 2001, however, the rate for women started to wane, falling sharply since the 2008-09 recession.

Figure 1 – Labor Force Participation Rate

Source(s): Bureau of Labor Statistics

The overall participation rate for both genders abruptly changed slope coincident with the last recession. Fewer men and women as a percent of the population 16 years and older are working or looking for work. The trend line in Figure 1 for the pre-recession participation rate clearly shows the accelerated decline.

This trend change is the difference between a high unemployment rate and a moderately elevated rate today. If the participation rate had stayed at the 2007 level, rather than decline, unemployment would now be 2 percentage points higher—8.7% instead of 6.7%.

Demographics Explain Most of the Gap
A large part of the recent decline in participation comes from the changing age distribution of the population. From 25 to 55, men and women are the most likely to be in the labor force (Figure 2). Within the younger cohorts, participation rapidly ramps up, and for older individuals, the probability of remaining in the labor force drops very quickly.

Figure 2 – Participation Rate by Age, 2013

Source(s): Bureau of Labor Statistics and MAPI

The crux of the slow labor supply issue is that baby boomers’ desire to work is diminishing at a fast clip. From 2008 to 2013, the U.S. population experienced a 1 million increase in people ages 16-24, a 1 million dip for ages 25-54, and a 12 million increase in the cohort of 55 and older.

Using the Census Bureau’s population projections, the next five years will see a 1 million decline in the bracket of 16-24 and a 1 million increase for 25-54. All the growth in the population 16 and older will come from an 11 million increase in the 55 and older group.

Although a larger proportion of people ages 55 and older will choose to work longer (either part time or full time), this will not be enough to offset the cliff effect of aging into older cohorts with relatively low participation.

Demographics of aging explain about 60% of the decline in the participation rate since 2007. A portion of the remaining decline is due to cyclical factors relating to a deep recession and the sluggish pace of the recovery and expansion. These able-bodied people will return to the labor force when the market is tighter and openings are more widespread. Meanwhile, problematic factors include skills being made obsolete through technological progress, jobs leaving some geographic areas, and workers who are so psychologically discouraged they will not seek work again.

Anticipate a Tight Labor Market
The aging baby boom generation will keep the participation rate falling for at least another decade, and some individuals’ decisions to work longer will not be enough to offset the tendency to retire. Skill shortages are already showing up in technical occupations. In a couple of years, firms should see widespread, tight labor markets, making young talent particularly difficult to find.


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