A few weeks ago my lovely wife and younger daughter, who is still in high school, traveled to Texas for a birthday party. It wasn’t just any party, it was the centennial celebration for my wife’s great aunt.
More amazing than this lady’s longevity is the fact she’s not alone. She and her two sisters (my wife’s grandmother and her two great aunts) all live together, ranging in age from 91 to 100. We call it “the house of little old ladies.”
Funny enough, despite their age and circumstances, these three women are considered part of the civilian non-institutional population, which is the potential labor force. In addition to these little old ladies, the definition also includes my high school-age daughter and her siblings, who are still in college.
That’s the odd thing about the potential labor force: It includes people who have no interest in working, at least not at this stage in their lives.
Per the Bureau of Labor Statistics (BLS), the civilian non-institutional population includes everyone living in the 50 states, plus the District of Columbia, who is 16 years of age or older. The exceptions are anyone active in the armed forces, or who reside in a hospital, prison, nursing facility, or other similar institution.
People who are working or looking for work make up the labor force. Those who aren’t working and aren’t looking for work aren’t in the labor force.
The problem is that today, there are lots of people who aren’t participating.
In the mid-2000s the civilian labor force participation rate hovered around 66%. In late 2008 it began to fall, dropping to just under 63% by late 2013 before it stabilized.
That may not seem like a big drop, but with roughly 250 million people in the civilian non-institutional population, each percentage point equates to 2.5 million people. That means that since late 2008, our economy has suffered not just the loss of productivity of those who are unemployed, but also the loss of those 7.5 million not participating in the labor force.
Many analysts use this as an indication that our economy has a lot of slack labor. If only we created more jobs, then the missing 7.5 million would rejoin the labor force and help propel the economy to new heights!
I don’t agree. I can’t think of anything that would convince the house of little old ladies to seek out gainful employment. Just as important, I can’t imagine what kind of jobs these pleasant but forgetful people who suffer ailments common to their age are qualified to perform.
At the same time, I’m not about to push my kids out into the world a minute sooner than they have to be. I know they count as part of the labor force when they take part-time jobs to earn a little cash, but outside of those times, they drag down the labor force participation rate.
When the financial crisis drove up unemployment, many people went to college or back to college to gain skills that would help them compete in the jobs market. College enrollment jumped by 2.4 million people from 2008 through 2014.
While young and old students alike were considering what courses to take, the boomers had their eyes on the retirement door, also bringing the labor rate down. The number of people over 65 — the age by which point over 70% of people retire — increased by 5.5 million from 2008 through 2014. That number will continue to rise for at least another decade.
For all the worry, the shrinking labor force participation rate doesn’t signal a catastrophe in the labor market. We can attribute most of the change to rising college attendance and the swelling ranks of retirees — both are natural and inevitable.
The good news is that the college kids will eventually join the labor force. The ones who graduate will likely be even more productive than they would have been without degrees, and earn more than their high school educated peers.
The bad news is that as our population of retirees grows, the nation must care for them as they cared for their predecessors, and this group typically doesn’t add a lot to productivity or consumption.
This will keep economic growth rates lower than they otherwise would be for some time. What’s more, it will also keep a lid on interest rates, because aging investors tend to focus on lower risk products like bonds and CDs. That will drive up demand for such investments… and also drive down their returns.