Thursday, February 19, 2015

Labor Force Participation Rate

The Labor Force Participation Rate (LFPR) represents the percentage of the employable population, age 16 and over, who are currently employed. From the Wikipedia page, it seems to be computed as follows:
  • Start with the entire population of the country.
  • Remove all children (ages 15 and younger)
  • Remove all individuals in institutions (prisons, mental hospitals, homes for the aged)
  • Remove all active duty military personnel
What is left: the members of the population who are considered available to work.

A few complaints: It appears that the disabled are included in this population of the employable. Which seems odd to me. A middle age quadriplegic living with his parents, or someone with a severe mental disability similarly living with his parents, seems to be included in the workforce. That doesn't make sense. That person can't work. That person is not employable. Also, a 90 year-old-woman with severe arthritis, living in an apartment on social security, is still considered part of the labor force. As long as one understands this, everything's ok. But many people don't understand this.

Here's the problem with the definition: as the baby boom ages, one will expect the LPFR to decrease. There are more retired people who aren't seeking work but are still considered employable according to the definition of LPFR. But we can just keep this in mind. The employable population by definition includes some people we would not expect to work, in particular the disabled and the retired, so we will never expect it to reach 100 percent.

The LFPR can be is available from the Bureau of Labor Statistics:

Two important observations:

  • A rise between the 1960s and 2000. During this period, many women entered the workforce. The LFPR rose from around 58% to 67.5%. This is an increase of 10% over 35 years.
  • A drop from 2000 to present, from 67.5% to 62.5%. This is a decrease of 5% over 15 years. This is much debate about the source of this drop.
Economists are studying the dropping LFPR. There are several sources:

  • Retirement. The baby boom has reached retirement age. It includes those born between 1946 and 1964. So the oldest are around 69. They are considered part of the employable workforce, but they are retired, collecting social security (or other forms of retirement), and therefore not seeking employment.
  • Disability. The availability of social security disability insurance, and a changing conception of what constitutes disability, may have increased the number or people not seeking work.
  • Education. An increasing number of people, given the changing nature of the workplace, may be returning to school (e.g. after a layoff).
  • Technology: The changing nature of work itself, automation, may have reduced demand for employees, thus causing a larger number to simply give up looking for work, to perhaps move back home with the folks.
I'll look into some of these arguments in a follow-on post. I'll also consider the relationship between the employment rate and the LFPR.