· Older workers retiring is a fashionable excuse for the declining labor force participation rate.
· Data from the Bureau of Labor Statistics don't seem to back up conventional wisdom regarding the reason for the decline in the labor force participation rate.
· Over the past several years, the labor force participation rate is actually up among those 65 and older.
· Since the start of the last recession, there has been a steady, notable decline in the labor force participation rate among 25 to 54 year olds.
Have you ever noticed how often people repeat things they've heard to others, as if those things are factual, despite the information repeated being nothing more than hearsay? Not only does hearsay thrive in the world at large, but it also thrives in investing and economic circles. Rumors routinely push stocks up and down, and hearsay seems to routinely find its way into the lexicon of analysts and economists when searching for excuses as to why things weren't as optimistic as they forecasted. For example, blaming "weather" is a staple in the world of excuses. Every once in a while it turns out to be a factual reason for disappointing data. But it is also an incredibly overused and far too often repeated excuse for weak data during the winter months.
Earlier this week, I noticed Janet Yellen, the new Chair of the Board of Governors of the Federal Reserve System, repeat something that makes the rounds as an excuse for the declining labor force participation rate. It happened on February 11 during the Q&A portion of her "Semiannual Monetary Policy Report to the Congress." In recent years, the decline in the labor force participation rate, shown in the chart below, has received much attention as something that indicates the labor market is not as healthy as many believe.
On Tuesday, Janet Yellen had this to say regarding the labor force participation rate decline (emphasis added):
"A significant part of the decline in labor force participation is structural and not cyclical. Baby boomers are moving into older ages where there is a dramatic drop off in labor force participation and (with) an aging population we should expect to see a decline in labor force participation..."
She further stated (again, emphasis added):
"There is no doubt in my mind that an important portion of this labor force participation decline is structural."
Janet Yellen is not alone in believing that the aging population is to blame for the decline in labor force participation. I have heard many people express this belief. But the facts don't seem to agree with this widely repeated excuse for declining labor force participation.
In June 2008, the Bureau of Labor Statistics began tracking the civilian labor force participation rate for individuals aged 65 and older. If Yellen is correct about a "dramatic drop off in labor force participation" among older age groups, we should expect, at a minimum, to not see the following chart trending higher. The chart, however, shows a rising labor force participation rate over the past several years among those 65 and older.
What if we drop the minimum age to 55? Surely that would show the "dramatic drop off" Yellen described among older individuals.
While this chart has dropped in recent months, it is up since the start of the last recession. The broader labor force participation rate, however, has plunged since December 2007.
So where is the "dramatic drop off" Yellen referenced? It appears it does exist, but not among the demographic Yellen thinks. What follows is a chart of the labor force participation rate among 25 to 54 year olds. The chart begins in December 2007 (when the last recession began) and shows a sizeable move downward.
In the aforementioned Q&A session, Yellen stated there is "no doubt" in her mind "that an important portion of this labor force participation decline is structural." She believes the structural decline has to do with older members of society leaving the workforce. Perhaps the structural decline is actually occurring among young and middle-aged workers.
In closing, keep in mind that just because something is repeated over and over doesn't make it true, even if it is repeated by well-respected and accomplished individuals.
Disclosure: I am long SPY, VWO, VEU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.