As I discussed in my last blog post (here), labor force participation rates, and trends in the rates, vary greatly by age cohort. While the overall rate has generally fallen for the past 10 years, individuals in the 24 and younger age cohort have been particularly affected. Meanwhile, the rate for those aged 55 or older has generally gone in the opposite direction over the same period and hit all-time highs after the Great Recession. Individuals within the prime working age cohort of 25-54 fall somewhere between the two extremes; however, the series trend has been downward after the great recession. What explains the trends?
The Bureau of Labor Statistics (BLS), using the Current Population Survey (CPS) and its Annual Social and Economic Supplement, investigated this very question (which can be found here). In that report, the BLS compared responses to surveys from 2004 and 2014. Individuals were asked to indicate whether they were not working due to being ill or disabled; retired; had home responsibilities; going to school; or other reasons. In total, the number of individuals that were not in the labor force in 2014 increased by 16.898 million or by 24% compared to 2004. Over the same period, the population of individuals over the age of 16 increased by 24.462 million or by 11% compared to 2004. Given the declining labor force participation rate over the period, it is unsurprising that the percentage increase in individuals not in the labor force was greater than the percentage increase in population. The table below shows how labor force non-participation has changed from 2004 to 2014 by age cohort, and how the change in each cohort corresponds to the total change (in the last column).
When investigated by age cohort, most of the action is in the relatively older age cohorts. For example, the 65 and older group accounts for 40% of the total increase in the number of individuals not in the labor force. In other words, there were 6.690 million more individuals not in the labor force aged 65 and older in 2014 compared to 2004. When spreading the net wider to capture the individuals aged 55 and older, 59% of the increase is accounted for. In other words, there were 9.835 million more individuals not in the labor force aged 55 and older in 2014 compared to 2004. Of this 9.835 million, roughly two-thirds reported being retired, and hence not in the labor force, and one-third reported being ill or disabled. Incidentally, the 55 to 64 year old group skews more toward ill or disabled than retired while the 65 and older group skewed toward retired.
At the youngest age cohorts (16-19 years and 20-24 years), the most commonly reported reason for not being in the labor force is overwhelmingly that they are going to school. In addition, the largest share of the increase in non-labor force participation is due to the same reason. From 2004 to 2014, the number of individuals not in the labor force in the two combined age cohorts increased by 4.040 million. Of the 4.040 million, 3.943 million is accounted for as a result of schooling.
With regard to the prime working age of 25 to 54 years, the reasons for the increase in the number of individuals that report not being in the labor force are diverse. Compared to 2004, 3.023 million additional individuals report not being in the labor force in 2014. About one-third is accounted for due to being ill or disabled; one-quarter is accounted for due to school; one-quarter due to a combination of home responsibilities and being retired; and one-sixth due to ‘other reasons.’ The break-out for this age cohort is shown in the figure below.
However, while this age cohort is large in terms of overall population, trends in this group are not representative of the entire 16 years and older population. As already discussed, the youngest age cohorts are dominated by individuals going to school rather than entering the labor force while the oldest age cohorts are dominated by individuals choosing to retire rather than enter or stay in the labor force. The figure below shows the growth in non-labor force participation breaks out by reason after combining all age categories.
Overall, of the 16.898 million person increase in those not in the labor force, 43%, or 7.208 million, is accounted for due to retirement. Slightly more than one-quarter (4.760 million) is due to going to school while slightly less than one-quarter (3.915 million) is due to being ill or disabled. With regard to group attending school, there are likely to be several possible reasons why those individuals may choose this rather than enter the labor market. For example, one possibility is that people are prioritizing schooling over working because they perceive the long-term value of an education, and the opportunity that it affords, as greater than the short-term gains of working (in economic terms, the net present value of receiving an education outweighs the net present value of working). However, it might instead be the case that individuals simply view the labor market as poor so they feel that they are unlikely to get a job even if they enter the market. With regard to the ill or disabled group, the reasons are probably a bit murkier, but tenable hypothesis are not hard to develop. Whatever the reasons, these data do not tell the story.
Nevertheless, the single reason that dominates the increase in the number of people not in the labor force over the period is retirement, as that accounts for nearly half of the total increase. What’s interesting is that retirement is the disproportionate reason for not being in the labor force for the age 55 and older age cohort, while at the same time the labor force participation rate of that cohort increased over the same period (as I discussed in my last blog post).
While there are several reasons why this might be the case, the reasons may be less important than what the data imply: namely that the population of individuals aged 55 and older is growing. Furthermore, the rate of population growth over the period from 2004 to 2014 outstripped the rate at which individuals in that cohort left the labor force. Over the period, the population in this cohort grew 33.4% while the rate of growth in the non-labor force was 25.6%, which means that a share of the increase in population continued to remain in the labor force. The same cannot be said of the other age cohorts, which experienced only marginal population growth rates over the period (1.8%) compared to significantly larger percentage increase in the number of individuals not in the labor force (22.0%).
Shifting demographic trends have changed the landscape of the labor force over the last decade and are likely to continue into the future. This is especially true with the older age cohorts that are growing in population; however, given that individuals in those cohorts are most likely to leave the labor force through retirement and not return, it is important to keep an eye on trends related to this group. In my next blog post, I will investigate how those demographic patterns have changed, why they have changed and what we may expect in the future.
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