The Real Reason The Labor Participation Rate Is Lower

The Right's ideologues have many "footballs" they love to kick around in the culture wars in the U.S. of A., but one of their favorites is the "labor participation rate".  To read some of the hogswill in assorted economic columns - especially as it hit 63.0 percent in 2017, you'd think the whole country had turned into lazy bums who no longer want to work. But this misreads the statistic in a major way.

First let's get into the nitty gritty of this stat.

Here's how to calculate the Labor Force Participation Rate.

LFPR = Labor Force / Civilian Non-Institutionalized Population 

where the Labor Force = Employed + Unemployed

To calculate the formula correctly, you must first understand the underlying definitions outlined by the Bureau of Labor Statistics.

Civilian Non-institutional Population = Everyone living in the U.S. who is 16 or older MINUS inmates of institutions such as prisons, nursing homes and mental hospitals and MINUS those on active duty in the Armed Forces.

Labor Force =  Everyone who is classified as either Employed or Unemployed.

Employed =   Anyone aged 16+ in the civilian non-institutional population who worked in the last week. That means they worked an hour or more as paid employees or 15 hours or more as unpaid workers in a family-owned business or farm. It also includes those who had jobs or businesses, but didn't work that week because they were on vacation, sick, were on maternity or paternity leave, on strike, were in training, or had some other family or personal reasons they didn't work.

(Each worker is counted once, even if s/he held two or more jobs. Volunteer work doesn't count nor work at home.)

Unemployed =  Those age 16 or more who weren't employed, but were available for work and actively looked for a job within the past four weeks.

Note here: people who would LIKE to work, but haven't actually gotten out, pounded the pavement and LOOKED for work, aren't counted.  They are counted in the population, however, which means the more of them, the lower the calculated labor participation rate.   This also includes those who have stopped looking for work entirely because they don't believe there are any jobs for them, and the BLS calls these discouraged workers."

Obviously, not all of these folks are bums, and that includes workers that become ill - say from severe diabetes or leukemia and then need to go onto Social Security disability. In the March 4 Denver Post article, 'Fewer Americans Working But Why?', we learn for example that "the share of Americans working dropped about 6.8 million from 1999 to 2016."   Did all those people become "lazy bums" on welfare or Social Security disability? No, as the article explains:

"Between 50 to 70 percent of the decline was due to an aging population"  which is reinforced by another WSJ piece from February 15 (p. A17) 'As Boomers Go Gray, Even 2% Growth Will Be Hard To Sustain' noting: 

"Slower growth is less the fault of Trump than his generation. Forty percent of the people born in 1946 have left the workforce."

But let's be reasonable here. "Blame" cannot be part of the nomenclature at all, because at some point every human - at least in the US of A  - is going to want to retire and halt the grind. (Retired people aren't counted among the work force, but are counted in the population, hence the larger the number of retired the lower the LFPR.)  Especially those members of the graying generation who are already having to fend off ageism in even finding decent jobs -  by which I mean jobs paying enough to make the rent - and yeah, save for retirement. So you cannot "blame" oldsters for the leaving the workforce, say when they hit the big Seven Oh. You can't even blame those who may choose to leave at 55 or 60 if they have enough money saved for retirement to make it.  You may be pissed that you can't do it, but you can't blame them for doing so.

Anyway, this still leaves some 30- 50 percent of the decreased LFPR to account for - according to the D. Post piece. Thanks to robust research by Katharine Abraham and Melissa Kearney of the University of Maryland, some answers are forthcoming. Well, at least to the extent we now know what isn't driving the LFPR downward.   In a draft paper released by the National Bureau for Economic Research last month Abraham and Kearney found that trade with China and automation are responsible for millions of missing workers.  (And missing jobs).

Other typical scapegoats of the Right's scolds, e.g. immigrants, food stamps and "Obamacare" - didn't "move the needle".  Other related findings:

- Automation cost more jobs than it created and "robots likely cost the economy 1.4 million fewer workers"

- The number of people going onto Social Security Disability doubled from 1999 to 2016, from 4.9 million to 8.8 million.  The population did age, but that increase was still "1.64 million more people than there should have been", i.e. had rates remained steady for each age group.

VA Benefits:

The two economists estimated that 0.15 million more people didn't participate in work because of the expansion of VA disability insurance. (Between 2000 and 2013 the share of vets receiving such benefits rose from 9 percent to 18 percent).

One last factor was deemed a likely contributor to the lower labor participation rate: the inability to move from one location to another  to find work as was generally done in the past. The reason is that the home is usually Americans' biggest investment and it simply may not be possible to move from A to B if one's home either can't be sold for the price assessed, or there are no buyers. Then, it would take a real leap of faith to just move to  a new locale  without a firm job offer even lined up.

Beyond all the labor participation rate kerfuffle, what those like Jason Furman (WSJ piece) are really getting at is how difficult it will be to attain even a 3 percent growth rate and sustain it.  Furman, for example, points to last year's growth rate (2.5 %) which while greater than previous is still an aberration. It is an aberration because "more than half of it is based on cyclical factors".  These "have little or nothing left to contribute" since we're at or near full employment. (Which again makes one wonder why all the fuss about a low labor participation rate. Do the wonks really want it to become even tighter and possibly fuel inflation?)

Furman doesn't see the growth rate over the next 5-10 year getting much more than the pedestrian 5- 10 %.   He lays blame on all of us retired boomers, as well as needing  "bigger  productivity improvements".   I already dealt with how the latter can be achieved by ditching the GDP e.g.
  http://brane-space.blogspot.com/2018/02/why-labor-productivity-needs-to-be.html

Noting:

"If the GDP is in error or doesn't measure what is really needed, then the labor productivity will be off too. "

How to easily improve productivity even with all the retirees? Simply include home work into the productivity equation.  For example, a 2015 Forbes article highlighted how 40 million family caregivers in the U.S. are putting their own careers on hold to provide unpaid care — sometimes for decades.   The estimated  total value of the care has been put at nearly $1 trillion. This isn't reckoned into the GDP but IF it were,  the labor productivity cited in the WSJ would surely be much higher in the years since 2007 - maybe even double or (1.2%) x 2  2.4 %. Which would then exceed the rate cited since 1947.

What to use in place of GDP? The Index of Sustainable Economic Welfare which was first proposed by Eco-economist Herman Daly of the University of Maryland. is a prime alternative  Daly's point was that the GDP was too artificial and narrow an indicator of economic health. He argued that if one incorporated all the "externalities" usually dismissed or ignored by standard economic models, people would be more parsimonious in how they consume which would yield a better world.

But will the economist wonks take note and agree? That remains to be seen, but I am not optimistic. If they did agree they'd be out of work!