April 11th 2016 - Written by: Michael O'Donnell

The Labor Force & Demographic Shifts

In my last two blog posts, I discussed trends in labor force participation (here) and reasons why so many people are out of the labor force (here). As I noted in my most recent post, 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 of the oldest age cohorts. In particular, those cohorts have managed to simultaneously increase their rates of labor force participation while at the same time adding the largest number of people not in the labor force.

The reason for this seeming incongruity is that population growth for this group is rapid. The population pyramid below, which is provided by the US Census Bureau, shows how the dynamics of the US population have changed through time. The pyramid, which allows you to scroll through years from 2000 to 2014, shows that the population density has clearly moved from the 25-54 age cohort to cohorts older than 55 years over the last decade and a half. In any event, as the population of the relatively older age cohorts has grown through time, some individuals within the cohort remain in the labor force and some retire, which implies that older age cohorts have become increasingly important players both in and out of the labor force.

With regard to increased labor force participation in older age cohorts, some commentators have argued that that the trend may relate to the impact of the Great Recession on soon-to-be retirees. In other words, wealth losses that resulted from the recession may have incentivized older individuals to stay in the labor force at retirement age, perhaps to recoup some of their equity losses. There is some academic literature that makes this point, for example: Mcfall, 2011; Goda, Shoven, & Slavov, 2011; Munnell & Rutledge, 2013; although other commentators have found more muted responses: Gustman, Steinmeir, & Tabatabai, 2011.

However, the impact of the Great Recession may only explain increased labor force participation but does not address the underlying population growth of this group. Population growth is coming through two main channels, the first of which is the Baby Boomer effect. As this large group continues to mature and reach retirement age, it will certainly move the density of the population to older age cohorts similar to what was shown in the population pyramid above. The other channel is longevity; in other words people are living longer. One way to see this is by looking at how 1-year mortality rates have changed through time. 1-year mortality rates, which are computed and published by the Centers for Disease Control (CDC), measure the average likelihood of death within one year at a given age.

The chart below, which comes from the CDC’s Decennial Life Tables, shows that the probability of death at every age 55 and above has fallen through time, with the spread widening at the oldest ages. For example, the probability of death within one year for a 65 year old fell from about 3% in 1981 to less than 1% in 2011, while the probability of death within one year for an 85 year old fell from about 12% in 1981 to about 6% in 2011. The general trend of falling mortality rates at a given age implies that the survival rate of the population at each age has increased through time; all else equal, this would lead to population growth for the relatively old aged cohorts. However, in this case all is not equal because more people (i.e. baby boomers) are entering the relatively old age cohorts.

Probability of Death within 1 year by Age

Looking forward, these general trends show no signs of slowing. Baby boomers will continue to reach advanced age and medical technology and (likely) healthier lifestyles will contribute to greater longevity of this group. In fact, the US Census Bureau projects that the 65 years and older age cohort will reach about 24% of the total population by 2060, which is up from about 15% in 2015. The figure below shows the 18-24 year old cohort, the 25-44 year old cohort, the 45-64 year old cohort and the 65 and older cohort (not shown is the 17 year old and under cohort, which is projected to fall from 23% of the total population in 2015 to 20% by 2060). By 2060, the cohorts 25-44 year old cohort, the 45-64 year old cohort and the 65 and older cohort will each comprise a shade below 25% of the total population and nearly one-half of the population will be older than 45 years.

Projected Proportion of Population by Age Cohort

 


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