Simple Arithmetic and the Participation Gap

One week ago Gavyn Davies, columnist for the Financial Times, noted that the labor force participation rate has dropped 2.8 percentage points since 2007.  He explained further that some researchers attribute about half of the decline to demographic change leaving a 1.3 percentage point drop in participation due to the sluggish recovery.  While I strongly disagree with the view that demographic change accounts for half of the decline in participation, that is not the emphasis of this blog post.*

Davies then conjectured that the decline in participation “implies that the genuine amount of slack in the labour market might be about 1 to 1.5 percentage points more than implied by the unemployment rate.”  Presumably Davies, the former head of the global economics department at Goldman Sachs, meant that official statistics report the unemployment rate on a labor force base that is considerably smaller than it would be in a healthy economy.

Where Davies gets this wrong is in the simple arithmetic of his calculation of the shrinking labor force.  Assuming that Davies is correct that the labor force participation rate dropped just 1.3 percentage points due to the weak economy, that decline is 1.3% of an adult U.S. population of 246 million or 3.2 million adults.  The labor force is now measured at about 155 million so the 1.3 percentage point gap in participation translates into a 2.1% drop in the size of the labor force. (about 63% of adults participate in the labor force).  If all of the 2.8 percentage point drop in the participation rate is due to cyclical factors that would mean that the weak economy has shrunk the labor force by 6.9 million adults or 4.4%.

When describing changes in percentage points and comparing one time series to another, analysts should be careful that the base for calculations are consistent. 1% of the adult population represents about 2.46 million people while 1% of the labor force represents 1.55 million people.  The official unemployment rate measures the slack in the labor market conditional on the size of the labor force, not the adult population.  Whether you believe Davies’ numbers or not, its clear that there are between 3.3 and 6.9 million Americans no longer participating in the labor force because of a weak labor market recovery.

*See my previous post explaining that in a healthy labor market participation should be rising not falling for adults age 55+ who are younger (due to the baby boom cohort), have longer life expectancies, longer to wait for Social Security benefits, and women in this age cohort greater lifetime labor force attachment than previous generations.

The Long Road Back to Full Employment

It will take years of vigorous sustained economic growth to restore the U.S. labor market to anything close to “full employment”.  Consider the case of young adults age 20-24.  The unemployment rate for this age group has fallen from 15% to 12.9% over the past three years.  Nonetheless, the labor market for young adults is anything but healthy.  The labor force participation rate for adults age 20-24 has fallen from 73.4% to 70.8% since May 2009 because of the weak recovery.  Although there are 264,000 fewer unemployed workers age 20-24 than there were three years ago, there are also 566,000 fewer labor force participants than if the participation rate had remained steady.

As I have written in a previous post to this blog, there is an even more dramatic decline in the rate at which young adults are finding full-time work.  In May, 2000 54.3% of adults age 20-24 were employed in full-time jobs, but last month only 37.1% of adults age 20-24 were employed full-time.  If today’s labor market was comparable to 2000 full-time employment of adults age 20-24 would be higher by 3.75 million.  Some of these 3.75 million workers are currently working part-time while others are unemployed, and still more have left the labor force.

Young adults aren’t the only workers dropping out of the labor force or settling for a part-time job.  When a vigorous economic recovery finally arrives there will be millions of underemployed and unemployed workers and labor force drop-outs looking for full-time jobs.  Given the slack in the labor market and the rate of population growth, two years of employment growth of at least 500,000 full-time jobs per month would be required to restore the participation rate, the employment to population ratio, and the fraction of workers in full-time jobs to pre-recession levels.  In other words 24 straight months of growth about five times faster than what we have seen of late is needed to restore full employment.

Women’s Declining Labor Force Participation

The Hilary Rosen – Ann Romney controversy about women’s choices between market work and home production is a reason to take a closer look at the trend in women’s participation in the labor force.  The labor force participation of adult women (age 25 and above) increased steadily from 1948, when the Department of Labor began measuring monthly participation rates, until the fourth quarter of 2008.  Since then the participation rate of adult women has declined by about 1.4%.  In the first quarter of 2012 the participation rate of adult women fell below 59% for the first time since 1996.  The participation rate for women in their forties has dropped by 2% in just three years.  In the first quarter of 2012, 75.6% of women in their forties participated in the labor market compared to 77.6% in the first quarter of 2009.  The percentage of women age 40 to 49 who participate in the labor market is at its lowest point since 1988.

Immigration Facts

Last week Marginal Revolution explained that the typical foreign-born adult resident of the U.S. is more likely to participate in the labor force than the typical native-born American and that the participation gap is “especially high among men”.  In fact, there is only a participation differential among men.  The labor force participation rate of foreign-born women is lower than for native-born women.

It is also worth noting that the labor force participation differential is strongly related to men’s educational attainment.  Labor force participation rates are higher for immigrants when comparing men with less than a college diploma.

For men age 25 to 64 who did not complete high school the participation rates are 63.3% for native-born and 87% for foreign-born men.  For high school graduates the participation rates are 79.9% for native-born and 89.5% for foreign-born men.  The participation rate differential for adults with some college is 3.4% and the gap is negligible for adult men with a college degree or more.

Less educated native-born men are significantly less likely to participate in the labor force than foreign-born men, regardless of educational attainment, and native-born college graduates.  The labor force participation differential between immigrant and native-born men is due to the unusually low participation rates of less educated men who were born in the United States.

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