NEW YORK ( Real Money) -- The issue of falling labor force participation rate has been the subject of attention by economists. When one looks at the long-term trends of the percentage of how many adults are working or looking for work, one can see a very clear long-term trend down, beginning in the mid-1990s. This has persisted -- and even accelerated -- during the recent recession and recovery. What do we make of it? What does this mean for the economy going forward?The first thing to consider is whether this is perhaps due to retiring baby boomers. And then, are recent college graduates not looking for work? Or, perhaps arguably more troubling, are people of prime earning years simply dropping out? To answer these questions, we can look into detailed analyses of labor market trends by gender and by age, and also look at different periods in history. Before looking at the data (which were obtained from the New York Fed and the Bureau of Labor Statistics) in detail, a first reaction one might have is that a falling labor force participation rate means that older workers are retiring. However, during the recent recession and recovery, that has not been the case. Instead, the participation rate for those aged 55 and over has actually increased by about 5 percentage points, with participation by women in this age group outpacing that of men, perhaps reflecting the differing occupations by gender. While the participation rate for both men and women increased, more physically demanding work, such as construction, manufacturing, public safety or sanitation jobs may not permit some older workers to extend retirement, and these jobs tend to be more male-dominated. So, no, the falling labor force participation rate isn't due to retiring workers. Their portfolios likely have been battered by the recent bear market (remember that people might not have been allocated to stocks in the same manner when the market rebounded since March 2009 as they were during the crash) and a low savings rate has compounded shrinking retirement savings. Therefore, retirement may be a luxury for some older Americans.
Is it due to people of prime working age dropping out? Here, we do see that both men and women left the labor force -- but only by a little bit. In the age group of age 25 to 54, the labor for participation rate fell by less than 2 percentage points. The rate fell a bit more for men than women, reflecting the fact that construction, a male-dominated industry, has seen the biggest surge in unemployment. However, this trend of the falling labor force participation rate of this age group since 2006 hasn't been much different than in the period of the recession of 2001 and that subsequent recovery. Now, here's where we really do see a big difference: young workers, age 16 to 24. During both this recession and recovery and that of the recession and recovery a decade ago, younger workers have had trouble finding jobs -- and some apparently aren't even looking for work. But the trend is much more pronounced this time around than in prior periods. Since 2006, the labor force participation rate for this age group dropped by a big 9 percentage points! At the same time, the unemployment rate for younger workers jumped by about 7 percentage points. When you consider the surge in unemployment and the plunge in people in the labor force, the percentage of this population which is working plummeted by 16 percentage points! While the younger age group has seen the biggest drop in the employment-to-population (E-P) ratio, it fell by more than 6 percentage points for those aged 25 to 54 since 2006 but rose a bit for those aged 55 and older, especially among women. Certainly, should older workers retire, that would allow younger workers to be hired, as middle-career workers are promoted. In that sense, the bear market of a few years ago and the low savings rate are indirectly dampening the need to hire younger workers. For all age groups, the E-P ratio fell by eight percentage points since 2006. Since the peak in unemployment in October 2009, the E-P ratio has only increased by 0.1 percentage point, while the unemployment rate fell by 1.7 percentage points, reflecting the falling participation rate as both employment and the population grew in tandem.
During the recovery is where we see patterns reverse: the E-P ratio of the younger workers, which plummeted the most during the recession, has risen most sharply since unemployment peaked, while mid-career workers have seen their E-P ratio remain at the same depressed level. A slightly greater percentage of older people are working now than before the recession. What this means is that for those workers who cannot seem to start their career, they may face a lifetime of lower earnings potential. The big hiring uptick of younger (and cheaper) workers includes mostly college grads but relatively few who lack a degree. The lack of growth of the labor force, reduced income potential of a still-big group of younger people, and high mid-career unemployment could hinder our economic growth potential for years to come.