No, Old Age Alone Does Not Explain The Decline In The Participation Rate

by: Vahan Janjigian, CFA

Summary

The November labor report wasn't great, but it was good enough to ensure for a Fed rate hike on December 14.

Concerns about the report include a decline in average hourly earnings and a decline in retail trade employment.

Yet the most worrisome problem is the continuing drop in the participation rate, which cannot be blamed on demographics alone.

On the first Friday of every month (with some exceptions), the Bureau of Labor Statistics releases the Employment Situation report. The most recent report showed a gain in nonfarm payrolls of 178,000 for the month of November and a decline in the unemployment rate to 4.6%. The first figure was in line with expectations. The second was better than expected. As a result, according to the futures market, the probability of a rate hike by the Federal Reserve on December 14 ticked a little higher to 97%.

Yet the report was not all wine and roses. For example, average hourly earnings fell by three cents from October to November to $25.89. This is just one month's observation, and hourly wages actually increased by 11 cents in October, so maybe the November decline isn't such a big deal. Yet it doesn't make for the kind of wage inflation the Fed would like to see.

A second not so rosy item in the report was the decline in the number of people employed in the retail industry. This figure fell by 8,300 from October to November. This seems strange because November usually marks the start of the holiday shopping season. This is the time of year when many retailers add temporary workers. In fact, the average increase during the past five Novembers was 4,550. The last time there was a November decline in retail employment was in 2010. I'm not sure why retailers held back this year. Perhaps they were just anticipating fewer shoppers in the stores and many more online.

Yet my biggest concern with the employment report is the continuing decline in the civilian labor force participation rate. It has fallen from 62.9% in September to 62.8% in October to 62.7% in November. And it is much lower than it was prior to the financial crisis and Great Recession, which ended more than seven years ago. Much has been written about why this measure is falling. Many commentators blame it on demographics. There is no doubt that you would expect to see a decline in the participation rate as the population ages. In fact, the Pew Research Center estimates that approximately 10,000 people will hit their 65th birthday every day for the next 19 years.

Yet it is also clear that demographics alone does not explain the full extent of the decline in the participation rate. Take a look at the graph. I have indexed the overall labor force participation rate (shown in blue) and the participation rate for people aged 65 and older (shown in red). The Bureau of Labor Statistics began providing this measure for older Americans starting in June 2008. As the graph plainly shows, the participation rate for older Americans has been going up while the overall rate has been falling. Just to be clear, the participation rate for older Americans is much lower (currently 24.1%) than it is for the overall population. The important point, however, is that it has been rising. As a result, we know that there has to be something more than mere demographics that explains the overall decline in labor force participation.

Clearly, there have been structural changes to employment. Even with a U-3 unemployment rate of 4.6% (a level many economists would say is close to full employment), there are approximately 95 million people who are not in the labor force. Which brings up the question, what are all these people doing and how are they supporting themselves? While there is plenty of anecdotal evidence, I'm not sure we have a clear answer to that question.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.

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