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August 19, 2014 at 10:21 AM
The aging of the U.S. population, cyclical factors related to the Great Recession and a mysterious third factor seem to be behind the widely discussed decline in the labor force participation rate, according to the White House Council of Economic Advisors.
Writing on economic research site Vox, the economists who advise President Barack Obama—Steven Braun, John Coglianese, Jason Furman and Betsey Stevenson—together with Harvard University’s Jim Stock, lay out their data and analysis to explain a trend that some critics have blamed on Obama’s policies.
“In part due to the vigorous, multi-front response to the economic crisis,” the White House team opens, “the U.S. has enjoyed a sustained economic recovery that has exceeded most contemporaneous and historical financial crisis benchmarks.”
Continuing to place the problem of low labor participation in context, they add:
“Up until a year ago, the unemployment rate was falling by an average of 0.7 percentage points per year, roughly tracking the more successful historical experiences, and well exceeding the norm following a financial crisis. In the past year, the pace of the decline in the unemployment rate has doubled.”
The problem of declining labor force participation, they write, pre-dated the financial crisis, and indeed, was predicted.
They cite, for example, a 2006 Brookings Institution paper that forecast labor force participation would decline three percentage points to 62.9% in 2014—exactly today’s rate.
The White House economists further contextualize the sharp 3 percentage-point decline since the fourth quarter of 2007 by noting that a four-decade surge in female participation in the workforce began to plateau in the late 1990s.
But the key turning point was 2008. Though “better known for the global financial crisis, it was also the beginning of a U.S. retirement boom as the first baby boomers (born in 1946) turned age 62 and became eligible for Social Security benefits,” they write, adding that “this decline, however, was amplified by the recession.”
To estimate the impact of this demographic change, the White House economists “hold constant the age-participation profile in 2007 and weight it alternatively with age weights as of 2007Q4 and 2014Q2,” ignoring other economic changes.
They thus calculate that aging accounted for 1.7%, or about half, the decline in workforce participation.
They next examine cyclical factors that are experienced in every recession. Just as a booming economy is usually accompanied by a rising participation rate, a lagging economy sees workforce participation fall below trend.
The White House team, after explaining their technique for calculating the effect of a lagging economy, said they “estimate that between 2007Q4 and the present, business cycle effects alone explain 0.5 percentage points (about one sixth) of the total fall in the participation rate.”
