Category: Labor Force participation rate

Labor Participation Rate

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April 6th, 2013

First I will look at a rather disappointing March Labor Report, released this past Friday.  Then I will zoom up and look at the big picture and some disturbing trends.  The net job gains this past month were 88,000, about half of the 169,000 average gains of the past year.  Remember that it takes about 150,000 job gains each month just to keep up with population growth.  Although the headline unemployment rate dropped .1% to 7.6%, it was because almost half a million people dropped out of the work force, meaning that they had stopped looking for a job in the past month.

Mitigating the meager job gains were revisions to previous months gains as more survey data was returned by employers. January’s job gains were revised from +119,000 to +148,000, and February’s gains were bumped upward from +236,000 to +268,000.  The two revisions added up to an additional 61,000 jobs; adding that to March’s gain of 88,000 gets close to the minimum gains needed of 150,000. The initial reaction of the market was a swift loss at Friday’s market opening of almost 200 points on the Dow.  By the end of the day, the market had regained much of the ground it lost, ending down about 40 points.

The average hours worked increased again to 34.6, a hopeful sign, but earnings saw no change.

Construction continued to show gains; the media’s attention to this area of employment probably gives the casual reader the impression that contruction jobs are a larger part of the work force than they actually are.

Compare that to Professional and Business Services, which has showed consistently strong gains and low unemployment.

Employment in the health care field continues to grow.  As a percent of total employment, health care continues to reach new heights, although its growth has moderated.  Taking care of the sick may be a sign of a compassionate society, but it consumes resources, prompting the question: what is the upper limit?  One in nine workers now work in health care.  Twenty years ago, the ratio was one in twelve. 

Over the past twenty years, the employment market has shifted markedly away from producing goods.  As a share of total employment, about 1 in 7 workers produces goods.  Just ten years ago, the ratio was 1 in 6.

What jobs did those workers find?  Serving food and drink to the ever growing share of people in Professional and Business Services.

The core work force, those aged 25 – 54, shows no growth over the past year.  I use the words “work force” to include only the employed.  “Labor force” includes both the employed and unemployed.  More on that in a bit.

I have written before about the year over year (y-o-y) percent change in the headline unemployment rate, or U-3 rate, and that past recessions usually follow when this change goes above 0.  The unemployment rate has benefitted remarkably from the number of people who continue to drop out and are no longer counted as unemployed.  Because of the drop outs the percent change in the unemployment rate is still in good territory.

A secondary indicator may be the y-o-y percent gain in the employed.  The long term average is 1.5%.  When the percent gain falls below that, recession soon follows.  The percent gain just fell below the long term 1.5% average.

Let’s zoom out to the past forty years to see how this percent gain in employment has preceded past recessions.  The exception was in 1973-74 when the Arab oil embargo created a sudden and deep recession in the country.

There was a decline in the number of people who dropped out but had been searching for work (but not in the past month) and were available to work.

The long term trend of those not in the labor force continues to reach new heights.  As a percent of the population, it  keeps climbing at an alarming rate.

Older workers are retiring, either voluntarily or involuntarily, at the rate of 800,000 a year.

Which brings us to several sometimes confusing concepts, the Civilian Labor Force (CLF), the Participation Rate, and other metrics.  The Civilian Labor Force is those people aged 16 and over who are either employed or unemployed.  To be counted as unemployed, a person is not working but has searched for work in the past month.  The unemployment rate is simply the percentage of unemployed in the Civilian Labor Force, which now totals about 155 million.  An unemployment rate of 7.6% means that about 12 million people are counted as unemployed. 

Then there is the Civilian Labor Force Participation Rate, or simply the Participation Rate, which is the percentage of the Labor Force to what the BLS calls the Civilian Non-Institutional Population (CNP).  Don’t go to sleep on me.  The CNP is those people who are aged 16 or more and who are not in prison or the military. 

So, the Participation Rate (PR) is the number of people who ARE working as a percent of people who CAN legally work; i.e. who are over 16 and not in some institutional setting that prevents them from working or finding work.


Let me give you some numbers and a pie chart.

The total population of the U.S. is estimated at 313 million; the CNP is estimated at 245 million.  The difference between those two figures are mostly children under 16 and people in prison and the military.  Here’s how the Labor Force compares with those not in the labor force and children under 16.

Why does the the Participation Rate (PR) matter?  As it declines, workers have to support more of those who are not working.  Many seniors feel that they “paid into the system” but the “system” – yes, your elected representatives in Congress – spent the additional money paid into the system over the past thirty years.  Social Security is a “Pay as you Go” system meaning that existing workers must somehow pay back into the system to pay benefits for those who retire.  Pay back = higher taxes. As the percentage of the population who works declines, taxes must rise or benefits decrease regardless of who paid into the system. 

This past month the BLS estimated a further decline of .2% to a level of 63.3%.  For comparison, Canada has a PR of 66.6%. 

Part of the decline is a natural demographic change as the population ages.   So how much has the aging of the population contributed to the decline in the PR?  What is the PR for those of working age 16 – 64?  Oddly enough, the time series figures are not easy to come by.  But before we get to that, let’s get to the surprises.

Since 2010, the older labor force, those aged 65+, has grown by 1.2 million. 

In 20 years, the participation rate among seniors has risen 50%, from 11.8% in 1990 to 17.4% in 2010.  The BLS projects that it will rise to 22.6% by 2020, a doubling in thirty years.  Seniors will continue to compete for jobs with the working age population.

Meanwhile, the participation rate of the core work force, those aged 25 – 54, is on a steady decline.

Now comes the biggest surprise, the decline in the working age Participation Rate.  To get the time series, I had to add a number of series together and take some population estimates by the Census Bureau.  Changing demographic shifts and 2010 census revisions make the series not entirely accurate but does give a good representation of the approximate 6% decline.

Let’s look at the last five years for the overall Participation Rate, which has declined about 5%. 

The aging of the population is contributing maybe 20% to the overall decline.  The bulk of the decline is a deterioration of the working age labor force.  Some are going back to school, some have given up looking for a job recently.  Many younger workers are finding it difficult to find a job. The Consumer Credit report released Friday shows another surge in student loans.  The FinAid student debt clock shows that student loans now exceed a trillion dollars. I have the sinking feeling that this will end badly. The participation rate for those aged 20 – 24 has declined about 7% and is now slightly less than the rate for all working ages. 

Payments under the Social Security Disability program, or SSDI, took about 10% of Social Security taxes in 1984.  They now consume 20% of SS taxes and are becoming an increasing burden on the Social Security program even as the boomers begin to retire.  The ranks of the disabled have grown more than 10% in the past three years.

A declining percentage of the population working to pay for an increasing number of benefits – this economic tension is sure to produce social and political conflict.  Many of us probably hold the vague hope that it will all work out somehow.  Some think that politicians in Washington will figure it out despite the fact that the solutions that Congress comes up with to most problems only exacerbate the problem or shift the problem to another area.

On the other hand, the baseball season is still young and anything is possible, right? 

Widgets and Labor

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March 9th, 2012

Labor costs are the major share of the expense of producing goods and services.  While the percentages vary by industry, a rule of thumb is that labor is about 70% of the final cost of a product.  The cost of labor to produce one widget should keep rising with inflation.  With the passage of time, widgets sell for more and employees demand more pay to produce those widgets.  Not surprisingly, the Bureau of Labor Statistics keeps track of the labor cost to produce widgets; they call it Unit Labor Cost.  In laymen’s terms we can think of it as the Widget Labor Cost.  The cost is indexed to a particular year year; in this case it is 2005.  If the labor cost of a widget was $2.43 in 2005, we’ll set that to 100.  Indexing makes what might seem like arbitrary numbers more uniform.  If the labor cost of a widget in 2012 is $2.67, then the index would read 110, or 10% more than 2005.

Widget labor costs typically fall or flatten out in a recession.  A graph of the past ten years shows that we still have not reached 2007 levels.

Keynesian economists say that labor costs are “sticky”, i.e. they do not decline in proportion to the downturn in the economy and the reduced demand during a recession.  Wages are the price of labor. Union contracts and employment laws do not allow these prices to fall to what is called the market clearing level.  Labor prices thus become too expensive and employers want less labor, resulting in higher unemployment.

Several decades of data allows us to see some changing growth trends in the labor costs to make widgets.

As I noted earlier, labor costs rise with inflation.  The graph below shows the relationship between the two.

After WW2, the rise in labor costs was just slightly ahead of the rise in inflation, allowing workers a greater standard of living and to put away some money for the future.  During the “stagflation” of the 1970s, this gap widened as workers demanded more pay in response to rising inflation while economic growth stagnated.  When the economy recovered in the mid-1980s, we began to see a narrowing between unit labor costs and the rate of inflation.  Had this narrowing stopped around the year 2000 and labor costs continued rising with inflation we would have a healthier work force and a healthier  economy.  But the gap narrowed further until labor costs were no longer keeping up with inflation.  Dwindling increases in labor costs have resulted in more profits for companies.  Although the labor market has a strong influence on the stock market, it is an indirect influence.  Stock prices are directly influenced by rising corporate profits and the perception that future profits will increase at a faster or slower rate.

Because wages do not rise and fall in proportion to the swings in the business cycle, companies took the only course of action left.  They reduced the labor component cost of their goods and services where they could.  Union contracts offer a company less flexibility in responding to downturns in the economy.  Companies reduced their exposure to union labor by outsourcing production to other countries, or by subbing out production to smaller companies with non-union workforces.  

Many people have been waiting several years for employment to recover.  As the chart above shows, there has been a systemic decrease in labor needed to produce each widget.  There is little indication that this trend will end as the economy continues to recover.  Since this economy is consumer driven, it is dependent on a healthy labor market.  A stumbling labor force will not produce robust gains in the economy. 

That is the background, the context for a look at February’s monthly labor report from the BLS, a better than expected report.  The headline job gain was 236,000, far above the 170,000 anticipated employment gain.  The unemployment rate dropped to 7.7% and the year over year decrease in the unemployment rate indicates little chance of recession.

There were other positive signs in this latest report.  Average hourly earnings of private-sector production and nonsupervisory employees broke above $20, increasing to $20.04.  After rising and stuttering last year, earnings have increased steadily since August 2012.  Despite these gains, hourly earnings of production employees are little changed from 1965 levels.

A slowly improving economy gave some hope that we might see the number of discouraged unemployed workers decline below 800,000 this month.  Instead the number rose from 804,000 to 885,000.

The Labor Force participation rate dropped another .1%.  Fewer and fewer workers are being asked to shoulder the benefits of the retired and unemployed.  The core work force aged 25-54 is still showing no substantial improvement.

While employment gains in the 25 – 54 age group have stagnated, the larger group aged 25+ continues to show improvement.  The unemployment rate for this larger group declined another .2% and now stands at a respectable 6.3%.  The employment picture for new entrants into the labor force, those aged 16 – 19, remains bleak.  This past month, the rate of the unemployed in this group increased and now stands at 25%.  Hispanics have seen a 10% decrease in unemployment during the past year but there are still almost 10% unemployed.  The minority group that has suffered the most through this recession has been African-Americans, whose unemployment rate has stayed subbornly high.  There have some small declines in unemployment over the past year, but almost 14% of this group is unemployed.

However, a group that has had persistently high unemployment, those without a high school diploma, saw a significant decline from 12% to 11.2%.

A significant contributor to that decrease is the steady rise in construction employment.

Perhaps not so widely followed is the “Craigslist indicator of construction activity.”  No, you won’t find this one charted anywhere but it does give a clue to what it going on in your area.  Search for “work van”, “work truck”, “step van” or “cube van” in your local Craigslist.  If there are a lot of listings, it means things are not good.  A few years ago, the Denver area used to have pages of work vehicles for sale by both owners and dealers.  This month there are few listings.

Other positives were the increase in the weekly hours worked to 34.5, in the pre-recession range.  Health care enjoyed strong gains as usual.  Professional and business services enjoyed strong gains, offsetting the unusually flat gains of January.  A rise in retail hiring was a nice surprise.

A bit of a head scratcher was the revision of January’s job gains, erasing 25% of the 160,000 job gains that month.  Revisions of that size leads to doubts about the winter seasonal adjustments that the BLS makes to the raw data. 

There are still 3 million fewer people working than in January 2008, when the BLS reported employment of 138 million.

In the past week the Dow Jones Industrial average crossed above the high mark of 2007.  On an inflation adjusted basis, the Dow is still well below the level it attained in 2000 and has still not passed 2007 price levels.  Some argue that the average 2.2% in stock dividends paid out each year partially compensates for the 3% loss in purchasing power.  Others argue that the dividend is compensation for the risks the investor assumes in the stock market and should not be taken into account.  If we disregard dividends, the inflation adjusted SP500 index is – well, it’s better than it was in 1990.

If a buy and hold investor has been in the market since 1990, she has gained 4% per year after inflation.  Adding in a dividend yield of about 2.5% over that time results in a total gain of 6.5%.  Had she bought a 30 year Treasury note in 1990, she would have been making about 8% per year for the past 23 years.  There are three lessons to be learned from this:  Diversify, diversify, diversify.