Thursday, January 16, 2014

Myths and Math

I have written a number of times about the labor participation rate over the last three years.  That is the % of Americans working compared to the total working age population (ages 16-64).  The unemployment rate just considers those who are currently seeking work .  

As I have written previously, I am more focused on the labor participation rate than the unemployment rate as a gauge on our economy. The unemployment rate calculation has become too subjective. It only counts those as unemployed if they are actually looking for work. It does not count those who become discouraged and have simply quit looking. It does not count the young slacker who has dropped out of school and is living in his parent's basement playing video games. It does not count the older worker who got laid off at age 59 and "retires" because of no decent job prospects.

In the end, every American is a mouth to feed, clothe and shelter. If there are fewer people pulling the wagon and more people in the wagon, we have a fundamental problem. The money gets spread around in thinner and thinner increments. That is just basic economics.

The labor participation rate in December slumped to a 35-year low of 62.8% last month. The last time we had a lower percentage of working age Americans employed was in 1978. Of course, in 1978 there were many fewer women working outside the home.  

Credit: Zero Hedge

To put the overall labor participation rate in perspective, there are now 92 million Americans of working age who are not working!  In December alone, almost 1 million Americans disappeared from the labor force.  

Credit: ZeroHedge

A number of commentators seem to suggest that the precipitous drop in the labor participation rate is no big deal.  They are quick to offer a number of explanations rather than confront the ugly facts in the charts above.  For example, they cite the aging population, more students in school and fewer men in the workforce compared to years past.

Diane Furchtgott-Roth of the Manhattan Institute debunks all of these myths and more in a column in The Washington Examiner.

Myth 1: The population is aging, so people are retiring earlier

You often hear that labor force participation is declining because older people are retiring. No harm in that, right? But since 2000, the labor force participation rates of workers 55 and older have been rising steadily, and the labor force participation rates of workers between 16 and 54 have been declining. The labor force participation rate of Americans 55 and older has increased by 5 percentage points from 2003 to 2013, and by 2 percentage points since the beginning of the recession in 2007. These men and women have seen increases in labor force participation rates and employment levels.
In fact, unemployment rates for the 55+ age group are lower than any other age group and they have also had the smallest percentage point unemployment rate increase of any age group since 2007.

Myth 2: Kids are in school, so it doesn’t matter

In 2013, 55 percent of 16- to 24-year-olds were participating in the labor force, compared to 62 percent in 2003, a decline of 7 percentage points.
Although this is a substantial decline, a common myth is that since these young people are in school, the change does not matter — because they are getting an education that will get them better jobs in the future. But the percentage of 16- to 24-year olds enrolled in high school, college, or university has risen by only 0.3 percent over the past decade, from 56 percent to 56.3 percent, an insignificant amount. These people are not in school, nor are they working.

Myth 3: It’s just men, part of a long-term trend

Male labor force participation has been declining for decades as they retire earlier and move from heavy manufacturing, with its hours of overtime, to higher-paying 9-to-5 service-sector jobs. But the shrinkage of the labor force over the past 10 years, especially since the recession, has hit both men and women — except for those older than 55.
Since 2007, the labor force participation rate of men 25-54 has gone down by more than two percentage points. For women it is one percentage point. For 16- to 24-year-olds, the rate has declined by five percentage points for men and four percentage points for women.
Here is the bottom line math on all of this since the beginning of the recession in 2007.

6 million more workers 55+ are working today than in 2007. Very few baby boomers are retiring if they have a job.

6 million fewer 25-54 year olds are working today than in 2007. Therefore, canceling out the job growth of the age 55+ group.

2 million fewer 16-24 year olds are working than in 2007.

This all adds up to 2 million fewer working age people working today than in 2007 despite the fact that the population of those of working age has increased by approximately 15 million.

Credit: Tim Wallace via Mike Shedlock

The chart above is from last October but it provides a good picture of what has happened. The red bars are population changes and the blue bars are job changes. This pretty clearly shows that it didn't really matter what age you were over the last six years. There have just not been enough jobs to go around.

The unemployment rate may be down but the number of employed today is much worse than it was over six years ago.  That is the only math that counts.

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