There is much excitement, by many. over the decline in the labor participation rate. They see it as some kind of signal that the economy is crashing. But why would the participation rate crash in this phase of the business cycle (the up phase), rather than for non-cyclical structural reasons? Is there some kind of new magical downward economic force that is preventing workers from finding jobs? Is it somehow causing the Fed to "run out of bullets"?
Markets clear. thus, it is only when we are moving from the bull phase of the business cycle to the bear phase,that we see sudden cyclical jumps in unemployment. So what is going on now? Let's take a look at the data.
The period 1948-1978 was a generally strong period for the economy, so a low participation rate does not necessarily mean a troubled economy. During the period real GDP climbed by more than 300%. (It even climbed during periods of steep downturns in participation, see for example the 1960 to 1965 period and the greater 1956 to 1965 period)
So if a "bad" economy isn't driving workers from the labor force, what is?
A report from the Bureau of Labor Statistics issued in November 2006 studied those in the non-participation category and found they generally fell into these categories:
1) The aging of baby boomers. A lower percentage of older Americans choose to work than those who are middle-aged. And so as baby boomers approach retirement age, it lowers the labor force participation rate.
2) A decline in working women. The labor force participation rate for men has been declining since the 1950s. But for a couple decades, a rapid rise in working women more than offset that dip. Women’s labor force participation exploded from nearly 34 percent in 1950 to its peak of 60 percent in 1999. But since then, women’s participation rate has been “displaying a pattern of slow decline.”
3) More young people are going to college. As BLS noted, “Because students are less likely to participate in the labor force, increases in school attendance at the secondary and college levels and, especially, increases in school attendance during the summer, significantly reduce the labor force participation rate of youths.”In InIn a report from Shigeru Fujita at the Federal Reserve Bank of Philadelphia on Feb. 6, 2014, Fujita concluded:
Almost all of the decline (80 percent) in the participation rate since the first quarter of 2012 is accounted for by the increase in nonparticipation due to retirement. This implies that the decline in the unemployment rate since 2012 is not due to more discouraged workers dropping out of the labor force.These studies fit with theory. Markets clear. In a boom cycle employment improves, if there is a climb in non-participation, it is for reasons outside the business cycle.
If you don't believe this, you don't believe Austrian school business cycle theory.
Robert Wenzel is Editor & Publisher at EconomicPolicyJournal.com and at Target Liberty. He is also author of The Fed Flunks: My Speech at the New York Federal Reserve Bank. Follow him on twitter:@wenzeleconomics