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Published by: forbesadmin on Jan 01, 2013
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January 1, 2013 
 Summary Points
Despite a historically slow pace of job creation coming out of the latest recession, theunemployment rate has steadily declined from its peak levels. A big reason for this is thathundreds of thousands of people have left the labor force and are no longer counted aslooking for work.
This is a complicated picture that includes “discouraged workers” and others who have
sought out an expanding social safety net of unemployment and disability payments. Butthere is also a mix of longstanding demographic factors and macroeconomic conditions thatis shaping labor force participation.
Because labor force participation rates are falling, fewer new jobs will be needed in the futureversus historical trends to keep the unemployment rate from growing. That is notnecessarily a happy story. Furthermore, the quality of those new jobs will determine whether
there will be a “lost generation” of workers who struggle to increase their human capital and
real standard of living.
The two drivers of GDP growth are increases in the labor force and productivity gains.Current trends in these regards point to slower GDP growth over time. However, the goodnews is that as investors we are not constrained to our home economy, but haveopportunities in foreign companies and global franchises based here that should continue tobenefit from more rapidly growing labor forces around the world.
Through much of 2012 the monthly Labor Department report on employment told a similar story. An averageof 151,000 new jobs were created each month, a pace that was well below previous recoveries and alsobelow the historical number needed to provide enough jobs to keep up with the expanding population. Yet
month after month the unemployment rate fell, defying most observers’ expectations and intuition. Every
month the story was the same. Enough people had dropped out of the labor force so that the percentageunemployed of those working and actively looking for work declined.Labor force participation measures the percentage of people 16 or older who consider themselves workingor looking for work. Everyone else is considered
out of the labor force. The path of thispercentage since World War II is shown below.
Source: U.S. Bureau of Labor Statistics
Labor Force Participation 1948-2012
The labor force participation rate today is as low as it has been in 30 years standing at 63.6%. It has beenfalling for over a decade, but the drop of more than 3% since the recession began in 2007 has beenparticularly steep. What is causing the labor force to shrink? There is no simple answer.To understand the decline, one must first appreciate why the rate was rising after World War II. The secondchart shows without question that the increase was entirely due to the evolutionary role of women in themarket labor force. While female labor force participation was almost doubling in the 50 years after 1948,male labor force participation was steadily declining.
Source: U.S. Bureau of Labor Statistics
The major factors driving labor force participation in the 50 years after 1948 were:
Women having more market work force opportunities and responding to them (+).
An increasing number of older men reaching retirement age (-).
A rapidly expanding college population, first of men and then of both sexes. This meant that manysimply deferred entry into the labor force (-).
Expanding real incomes, allowing people to retire earlier (-).
Expanding social safety net programs, allowing some in the population to voluntarily leave the workforce (-).The dramatic increase in female labor force participation in the first 35 years of the history was large enoughto offset the other forces, and by 1968 began to push total participation higher. By the mid-1990s, however,female labor force participation had peaked and all the forces were working in the same downward direction.Notice that what is not on this list, or evident in the charts, is the important impact of the many recessions thecountry went through over this 64 year period. The business cycle matters at the margin, but it takes fairlysophisticated statistical analysis to estimate by how much. Such a study was recently performed by WillemVan Zandweghe of the Kansas City Federal Reserve Bank.
His conclusion was that half of the dramaticdecline in labor force participation since the financial crisis in 2008 was due to the recession and the other half could be attributed to demographic forces that would have been in place anyway.
Willem Van Zandweghe,
Interpreting the Recent Decline in Labor Force Participation
Federal Reserve Bank of Kansas CityEconomic Review, First Quarter 2012.
Male and Female Labor Force Participation 1948-2012
Total PopulationFemalesMales
The interaction of demographic trends and labor force participation is further demonstrated in the last chartshowing how participation rates have varied through time by age of the worker. The focus of this chart is onmale workers to avoid the additional factor of child bearing age for women.
Source: U.S. Bureau of Labor Statistics
 The data is not complete for all age groups because the Bureau of Labor Statistics apparently did not findtraditional retirement age workers interesting enough to focus on separately until 1978. But there are anumber of observations worth noting in this data:
Not surprisingly, peak labor force participation occurs between 25 and 54 years of age, and the trendfor this group has been steadily downward for over 60 years.
The most dramatic declines in labor force participation are in the 16-24 year group because of increased attendance in higher education and in the 55-64 year group, likely because of increasedstandards of living and
increased social safety net programs allowing for early “retirement.”
Labor force participation drops meaningfully with traditional retirement at 65 and declines further withage as shown by the differences in participation for the 55-64, 65-69, 70-74 and above 75 agegroups.
Over the last 20 years
, however, all of these older groups’ participation rates
are trending higher,suggesting that better health and greater longevity are encouraging more
workers to stay inthe labor force. There is no suggestion in the chart that these trends are greatly affected by thebusiness cycle.This chart shows how complicated a mosaic these labor force participation figures really are. We hear anecdotes about people continuing to work because they cannot afford to retire after the recession andmarket turmoil. While there are no doubt many such stories, the more common scenario is the productive,healthy worker who asks why he should quit when he expects another twenty or more years of life. As moreand more baby boomers retire, labor force participation can be expected to continue downward, but perhapsat a somewhat slower rate as more seniors stay active in the work place.
Male Labor Force Participation by Age
(1948 - 2012)
16 to 24 years25 to 54 years55 to 64 years65 to 69 years70 to 74 years75 years and over 

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