Demographics Account For 50% Of Decline In LFPR
As an update to yesterday’s post about the possible contribution of demographic effects on the recent decline in the U.S. Labor Force Participation Rate (see chart above), here are excerpts from two Federal Reserve research reports on the topic.
1. From the conclusion of “Interpreting the Recent Decline in Labor Force Participation,” by Willem Van Zandweghe at the KC Fed (emphasis mine):
“The sharp decline of the LFPR since the onset of the recent recession is due to long-term shifts related to demographic trends and to the cyclical downturn in the labor market. A variety of evidence indicates that, on balance, trend factors account for about half of the decline in labor force participation from 2007 to 2011, with cyclical factors accounting for the other half.”
2. From the conclusion of “Explaining the decline in the U.S. labor force participation rate,” by Daniel Aaronson, Jonathan Davis and Luojia Hu of the Chicago Fed (emphasis mine):
“Labor force participation has fallen significantly over the past decade. At least some of this decline is due to the recent deep recession and lackluster recovery. Additionally, for quite some time, economists have forecasted that shifting demographics, particularly in the age structure of the population, would put downward pressure on labor force activity. We estimate that just under half of the decline in LFPR since 2000 is due to such factors. We expect these demographic patterns to continue for at least the next decade, and likely far beyond, as the large baby boom cohort continues the transition into retirement. Therefore, standard labor market measures used to compute gaps in resource utilization, such as the employment-to-population ratio and the LFPR, should reflect these long-running patterns.”
Bottom Line: Both research reports come to the same conclusion that about half of the decline in the LFPR in recent years is due to long-term demographic trends and the other half of the decline is from the cyclical factors relating to the 2007-2009 recession.