A James Alexander post
We often hear from both the right and the left that the relative lack of growth in the US is mostly due to supply issues, in particular changing demographics. Those baby-boomers retiring have created a new stagnation. The US Bureau for Labor Statistics (BLS) has consistently encouraged this view. There’s really nothing that can be done about it.
Fortunately, we can test this consensus theory by looking at the 2002 projections made by the BLS themselves to model the impact of the ageing population on participation rates and comparing them with the current data, also from the BLS.
Every few years the BLS creates projections for the next fifty years or so. Helpfully, in the 2002 projections out to 2050, as well as giving decennial figures, they also gave one for 2015.
Back in 2002 the BLS projected a Civilian Labor Force of 162.8 million potential workers over the age of 16. They projected this figure by taking the population over 16 years of age and then adjusting for typical labor force participation rates per age cohort, sex and other factors.
Currently, the over 55’s have around a 40% likelihood of being in the labor force, under 55’s a 75% likelihood. It is typically higher for men at 69% participation vs women at 57%. Even that statistic is a bit misleading as women live longer than men, so the age-adjusted participation rate between the sexes will be closer. These rates are constantly changing. The over 54s used to have a 30% participation rate 20 years ago, although age-adjusted this may also be less of an increase than it it seems as baby-boomers are altering the age profile of the over 54s, ie more younger oldies.
These sorts of changes are exactly what the boffins at the BLS take a lot of trouble to model. And undoubtedly they do a good job. They took the US Census Bureau projections for population and then applied their own models and came up with an expected participation rate of 67% in 2015 based on the demographics. The BLS expected the rate to fall to 65% by 2020 and then flatten out at 62% in 2030 as the baby-boomer bulge worked its way though the general population.
However, the actual participation rate in 2015 was just 63% a four point gap, representing nearly six million missing workers. It is possible the BLS got their models wrong, there is no real way of telling except to wait and see if they are 4% light in 2030 too. Of course, in reality it will be too late to tell by then as the six million will be into their advanced old age too. It will just be a couple of hundred million lost man-years of work by then so not a lot anyone can do about it.
The rest of the lost workers are a consequence of the Census Bureau themselves underestimating the size of the US 16+ population. Higher legal and illegal immigration than expected had swelled the 16+ population by over four million adults to 248 million by 2015 versus the 2002 projection of 244 million.
Adding these two numbers together give us the ten million missing working adults in the US in 2015 versus the demographically smart projections of 2002.
Marcus Nunes has argued long and hard that the calamitous shift of trend NGDP in 2008 caused most of the drop in the participation rate. The situation is clouded by huge demographic shifts for sure, but they mostly come later in this decade and the next one, not in 2008 as the BLS projected back in 2002. The subtle, but constant, downgrading of their expected Civilian Labour Force is very much worth drawing attention to.
The “early onset” demographic change looks having been caused by Marcus’ NGDP trend shifting down. The BLS are not to blame for their 6% or so miss in the size of the labor force as they could never be expected to model for the disastrous monetary policy causing the dramatic 2008 recession and the hugely long drawn out recovery period. But the BLS should stop constantly suggesting that the current low level of participation is due to the baby-boomers, that’s not what they expected in 2002.
Enough already!
Historinhas 
Let’s see: kick 10 million Americans out of the labor force, and then be surprised when they vote for a Don Trump or socialism.
You got that right, Ben. Hey, I found the two charts that prove MMers were right about inflation targeting. I hope you like this simple explanation of NGDP Targeting. The author of the above article just adds more proof that the government is in the hands of the private Fed and is lying, Benjamin: http://www.talkmarkets.com/content/us-markets/ngdp-targeting-and-market-monetarism-made-easy-with-graphs?post=82536&uid=4798
Good to see the “socialism” agreeing to Audit the Fed. It’s right the Fed gets it in the neck, even if the Audit the Fed mob have little idea what to do with the Fed. Screwing inflation to zero is a clear failure.
According to that 2002 prediction, there could be a labor force of about 164.7M in 2020. The civilian labor force was 157.8M in December 2015. To get to 164.7M in December 2020, about 115k new jobs per month are needed. In other words, at 200k jobs per month, the Fed is roughly on track to close the gap in about half that time. By 2018, the US should be very close to full employment, by 2002 standards (that is, if the Fed lets enough breathing room for 200k jobs per month).
Job participation will still be low, right? I mean, it declines yearly.
As James Alexander explains, it would be at 65%.
LK Beland is right. It should be at 65% now (6 million more), and on a higher population base (4 million more). It does drop naturally over the next 10-15 years, but it could drop more if we stick with lower and lower NGDP “growth”.
Roughly on track in terms of job creation, if that is what they are targeting. Hard to see how tightening monetary policy will keep them on track. Of course, they are still way off track in terms of a monetary policy promoting stable nominal growth. NGDP growth is dangerously low and going lower. It could easily end up like Switzerland is or Japan was.
It seems to me that a low NGDP growth (say 2-3%/year for the next 5 years) will be more of a challenge for the debt market (e.g. if the government wants to reduce its debt-gdp ratio) than for the labor market (which, in 2015, seemed to do fine with sub-3% nominal growth). I’m not exactly sure how this ties into investments.
Of course, had nominal growth been robust post-2008 (say at 6% per year), we would probably have reached full employment somewhere in 2013 or so (instead of 2018).
Should have made clear in the post that for all the analysis of LFP rates etc that there is no link between full employment and inflation. The Philips Curve is false.
There is only a link between lack of NGDP growth and unemployment caused by falling AD (seen by companies as “weak revenues”) and the need to cut costs to match them. Sticky wages means jobs have to be cut as wage growth rarely or never goes nominally negative. Low NGDP growth is fine for a while, but a small drop in AD due to a demand shock caused, maybe like now, by premature monetary tightening will not end well. There just isn’t room to make mistakes at 2-3% NGDP growth.
Demographics yes, but there is a real drop in participation after controlling for race and age.
If you look at this: http://www.bls.gov/emp/ep_table_303.htm
You can see that high-resolution age-cohort groups are all down. Particularly jarring is men in their 30s and 40s, who “should” be working under most conceivable social arrangements, are down 1994-2014. NGDP or a mass outbreak of househusbands? The major US racial groups participation rates are all down as well, so it’s not a result of the shifting ethnic composition. As Marcus said recently, the drop in the LFP rate right in 2008 is telling, it wouldn’t just fall off the proverbial cliff like it did if it were not a demand issue, demographic causes should have a smooth trasition.
I tend to think there’s a structural aspect as well, we’ve burned through our social capital and created a society where many people feel nihilistic, alienated, and living off welfare and doing heroin becomes tempting. Thinking of Murray’s “Coming Apart”. The NGDP shortfall probably accelerated that process, the way a recession can shatter a fragile industry as happened to marginally profitable, labor-intensive US manufacturing in 1992 and 2008.
The most educated and wealthy are OK, and seem to have little interest in those left behind. But as Ben points out there are more in the latter group and they vote. It’s not inevitable that the choice is between Trump and socialism, the educated and wealthy could support NGDP Targeting and things would change for the better, plus some supply side reforms like ending abusive state-backed monopolies run by the upper classes, eg medical doctors.
Is there a good article out there detailing the exit of dovish FOMC voting members and entrance of hawkish FOMC voting members at the end of 2015 / beginning of 2016?
I don’t disagree about the lack of monetary support, but at least in 2007, the BLS LFP forecasts strike me as optimistic. http://idiosyncraticwhisk.blogspot.com/2013/12/labor-force-participation-trends-and.html