Previously in , we looked at data from the that showed, among other things, a falling participation rate since the turn of the century (see Chart 1). We also saw that even though unemployment has fallen over the last 5 years or so, that fall was at least partially a result of people leaving the labor force entirely rather than finding employment. Here we will take a more detailed look at those people classified as not in the labor force (those deemed to be not participating) to see if we can explain why the participation rate is falling.
Chart 1 – Participation Rate vs. Employed Population as a Percentage of Total Population 1947 to 2014
Courtesy of Bureau of Labor Statistics (BLS) data we can actually break the population of people not in the labor force into several different subgroups, starting with two main groups: people who want a job (but don’t fall under the unemployed category); and people who don’t want a job. These populations can then be further broken down into subgroups based on: gender; race; and age. For our purposes we are going to focus mainly on the two main groups, people who want work and people who do not, with the latter further split into three age brackets (16-24, 25-54 and 55+). Chart 2 shows the break down of these groups (12 month moving averages have been used to smooth the series).
Chart 2 – Breakdown of Population Not in the Labor Force 1995 to 2015
Looking at Chart 2, aside from an increase of over 20 million people over the last 20 years, no obvious trends emerge – none of the subgroups really appears to be shrinking or expanding significantly and all seem to be more or less moving in line with population growth. And, in fact, if we look at the percentages, this is more or less what we see:
Chart 3 – Breakdown of Population Not in the Labor Force – Percent of Total – 1995 to 2015
Keeping in mind that the left hand axis of these charts has been zoomed in to exaggerate any changes, we can see that over 20 years, the proportion of the total population of people not in the labor force in each age bracket has not changed significantly. Summarizing:
- Don’t Want a Job – 55+ years: fell a couple of percent from 2001 through to 2011, but in the past four years has basically recovered to where it was pre-2001.
- Don’t Want a Job – 25-54 years: slowly increased around 1.5% from 1995 to 2005, but has now fallen back below 1995 levels.
- Don’t Want a Job – 16-24 years: Increased around 5% from 1995 to 2011 but has fallen back a couple of percent since.
- Do want a job – All Ages: Fell 4% from 1995 to 2001, was flat from 2001 to 2009 but has increased around a percentage point since.
Looking at the data this way, there aren’t many conclusions to draw. There is not enough real movement in the numbers to suggest anything is fundamentally changing in the pool of people considered not in the labor force.
However, one of the issues with analyzing data like this can be that the large pool of existing people can tend to obscure more rapid changes happening when you look at new entrants to, and exits from, that pool. So what does the picture look like if we analyze only the changes in the population from year to year?
Chart 4 – Annual Change to the Population Not in the Labor Force 1995 to 2015
* 2015 figures are only for January, February and March
Looking at Chart 4, we can see several interesting trends and changes.
The first trend that becomes clear is how much of the growth in the population of people not in the labor force since the global recession in 2008-2009 is due to over 55 years olds. In fact, from 2010 to March 2015, the 55+ years age group contributed just over 75% of the growth in the population of people not in the labor force. And this trend has been accelerating. In 2014, the last year for which we have complete data, the 55+ years age group contributed close to 95% of total growth.
The second trend that stands out concerns 16-24 year olds. In this case there are large increases in the number of 16-24 year olds entering the population not in the labor force immediately after the two major downturns, the bursting of the tech bubble in 2000 and the financial crisis in 2008-2009. This suggests that following a downturn, young people are electing to either delay entering the workforce to stay in school longer, or are leaving the workforce and going back to school.
The third and final observation relates to those who indicated that they want a job, but do not meet the formal criteria to be classified as unemployed. In 2008 and 2009 we see large increases in the population of people who wanted a job but are not in the labor force. This is expected and corresponds with the financial crisis when millions of Americans lost their jobs. However, from 2010 onwards, the rate of this increase slowed, and, in some years, even reversed.
Drawing all the threads together, what are the main conclusions we can make from the above observations? My main takeaways are as follows:
- The growth in the population of people not in the labor force (and the decline in the participation rate), particularly over the past 5 years, has been mostly driven by over 55 year olds. This actually agrees with one of the more prevalent theories for why the participation rate is falling – the baby boomer generation is reaching retirement age and retiring en masse. Additionally, this trend of decreasing participation seems set to continue, meaning a decreasing percentage of the population will be required to fund the government for an ageing population.
- 16-24 year olds tend to drop out of the labor force in the immediate aftermath of downturns. Given the age range, a logical explanation for this is that, when the job market is poor, young people elect to either stay in school longer or return to school to pursue further studies. The positive news is that the spikes in young people leaving the labor force appear to be short term. Additionally, taking a long-term perspective, more young people pursuing higher education will arguably benefit the wider economy in later years.
- Since 2013, the number of people not in the labor force who do want a job appears to be on the decline (or has at least leveled off). This in turn suggests the current recovery is a genuine one, even in the face of a falling participation rate.
Finally, I want to leave you with one last chart. Chart 5 shows the changes in the proportion of men and women in the population of people not in the labor force. The positive news is that, although there is still a gender divide, it appears that the gap is continuing to close. In fact, 2014 was the year in which women represented the smallest proportion of the population not in the labor force, and the first time (probably since the US existed) that the percentage has dropped under 60%.
Chart 5 – Gender Split of Not in the Labor Force Population 1947 to 2014