During her first testimony before Congress on February 11, 2014, Janet Yellen said the following:
Baby boomers are moving into older ages where there's a dramatic drop off in labor force participation and [in] an aging population we should expect to see a decline in labor force participation, and as you noted that has been going on for some time.
Note: She is trying to explain that the declining labor force participation rate can be explained by the structural trend in baby boomers retiring, hence causing the denominator in the rate to increase.
But it is important to realize that we're seeing declining participation also among prime age workers and among younger people. And it seems to me, based on the evidence I've seen, that some portion of that does reflect discouragement about job opportunities. But there is no clear scientific way at this point to say exactly what fraction of that decline is cyclical [vs. structural].
Note: She appears to be minimizing the dramatic decline in participation rates among prime age workers by expressing puzzlement about whether the trend is cyclical or secular. But BLS data show that the participation rates for prime age and younger workers have gone down dramatically over the last twenty years, and will continue to go down through 2022. That seems structural and not cyclical. I would also point out that if she can attribute, with some certainty, the decline in the overall participation rate to baby boomers retiring, she can certainly see the equally obvious impact of 20 years of declining participation rates among people aged 16-54.
Chart 1. Labor Force Participation Rate (number of people employed or looking for work divided by number of people aged 16 and over)
First address the baby-boomer question. Yes, older workers have a lower participation rate than other age groups, but she chooses to ignore that the older worker rate has also risen dramatically in the last twenty years and will continue to go up.
For people aged 55 and older the rate has gone up from 30% in 1992 to 41% in 2012. Meanwhile the participation rate for people aged 16-54, what she calls "the prime age workers and younger people", has gone down almost as dramatically when adjusted for how large the contingent is. Their combined rate went from 80% in 1992 to 75% in 2012 and is expected to reach a rate of 74% in 2022. See Table 1.
Table 1. Labor Force Participation Rate by Year/Age (with projections out to 2022)
It is also true that the contingent of people aged 55 and older is growing very rapidly, and by 2022 will be double the 1992 number. This is not the case for people aged 16-54, where the population growth is expected to be less than 20% between 1992 and 2022. Table 2.
Table 2. Number of People Aged 16 and Older
So what is more responsible for the labor force participation decline, as pointed out in her testimony?
- Is it because there is a rapidly declining participation rate for people aged 16-54?
- Or is it because the number of people aged 55 and older will double between 1992 and 2022, and so skew the apparent overall participation rate by padding the denominator?
If I hold all else constant and simulate the population of those aged 55 and older only growing by 10% every ten years (still faster than the other age groups) then the overall labor force participation rate looks only a little lower by 2022, compared to 1992. So she is correct that boomer retirement has a decisive impact on the participation rate.
But then if I hold all else constant and make the participation rates stay at 1992 levels for people aged 16-54, then the overall labor force participation rate also looks almost like it did in 1992. So the answer to the above questions is that both phenomena - more boomers retiring and the low participation rates for people age 16-54 - can be viewed as equally responsible for the low overall labor participation rate. See Chart 2.
Chart 2. Showing Actual and Simulated Labor Participation Rates Under Two Different Scenarios
But since we can't solve for people growing old, and anyway the impact mostly presents a problem with optics, it strikes me that Yellen is trying to deflect the conversation away from an inquiry into the meaningful reasons about what is really happening to prime age workers. And I think she is failing to be frank about the obvious multi-decade downward trend of participation rates among people aged 54 and younger.
To put additional numbers to this, of the 26 million jobs added between 1992 and 2012, 17.4 million jobs went to people aged 55 and older, 9.8 million went to people aged 25-54, and 330,000 jobs were lost for people aged 16-24. See Table 3, Column A from the BLS. In fact, without the 55 and older group adding millions of jobs since 1992, we would be much worse off.
Table 3. Jobs Added from 1992-2012 (numbers in thousands)
If I further split the gain in jobs for people aged 55 and older between the effect from there being more people in this contingent (volume impact) vs. the effect from a greater participation rate (rate impact), then both volume and rate have contributed equally to the additional 17.4 million jobs for this group. Note that people aged 16-54 had job gains due to a volume impact, but then lost 7 million would-be jobs due to the precipitous drop in participation rates. Table 3.
Will these trends reverse through 2022? According to BLS data the answer is no, so we can be reasonably confident that the first chart shows a structural shift, driven by changes to our economy and society, with little meaningful cyclicality to be found. See Table 4 where prime age and younger workers will continue to lose jobs from ever declining participation rates.
Table 4. Job Projections 2012-2022 (numbers in thousands)
A final question is whether these declining labor participation rates matter. If there are prime age workers and younger people looking for jobs and can't find them or are not skilled enough to get them, this is both an economic as well as a social problem. Either way, 9.5 million jobs between 1992 and 2022 have been and will be foregone because of these low and declining participation rates. And I would argue that trying to gloss this over with vague talk about baby-boomers and feigned confusion about whether it is cyclical or structural is not helpful in the least.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.