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.

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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