Retiring boomers cause of shrinking workforce: Philly FedNews added by Benefits Pro on December 12, 2013
By Dan Cook
The Federal Reserve’s man in Philadelphia has discovered a hidden and significant job market participation trend.
Either that, or he’s found a way to put a positive spin on a negative trend.
In a paper titled, “On the Causes of Declines in the Labor Force Participation Rate,” Shigeru Fujita of the Federal Reserve Bank of Philadelphia offers the opinion that the drop in the number of people participating in the workforce is due to baby boomers retiring and not, as often conjectured, “discouraged workers” who have given up hope of ever landing work.
The workforce participation rate declined between October 2009 and September 2013 from 64.4 percent to 63.2 percent.
This drop has puzzled “experts” because the unemployment rate also has been dropping during that time.
Offering a highly contrarian view, Fujita tells us not to worry, but rather to celebrate.
The participation decline can be attributed, since 2012, to boomers retiring, not the unemployed giving up, according to his theory.
It’s a matter of pent-up boomer retirement demand, he argues. “The 2008 financial crisis and associated losses of wealth might have had the effect of delaying (baby boomers’) retirement age, while the subsequent recovery of financial wealth has allowed more of them to retire in the last few years,” Fujita says.
He supports his claim with an examination of Current Population Survey data that, the author says, reveals that baby boomers began to retire in droves in 2012.
Having said all this, Fujita acknowledges his overall thesis is based on conjecture, at least somewhat.
After all, when a boomer is asked for the CPS survey whether he/she has retired or is looking for work, the boomer gets to decide whether extended unemployment and frustrated job searches constitute retirement or not.
The larger question of what constitutes retirement in this era of contractors, freelancers and aging unemployed workers is not addressed.
However, assuming for the sake of his theory that the CPS data is accurate, Fujita proceeds to discount the “discouraged worker” explanation for decreasing workforce participation.
His “main findings:”
1. Between the first quarter of 2000 and the second quarter of 2013, the participation rate declined 3.9 percentage points. Roughly 65 percent of the decline is accounted for by retirement and disability. The increase in nonparticipation due to retirement has occurred only after 2010, while nonparticipation due to disability has been steadily increasing over the last 13 years, except for the last few years.
2. The number of those who did not look for a job (thus being out of the labor force) even though they want a job increased significantly between the fourth quarter of 2007 and the fourth quarter of 2011. This group of “discouraged workers” explains roughly one-quarter of the total decline (2.5 percentage points) in the participation rate over the same period. Between the first quarter of 2012 and the second quarter of 2013, the participation rate of this group has been roughly flat.
3. The decline in the participation rate since the first quarter of 2012 is entirely accounted for by increases 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.
So, Fujita says, it’s time to consider boomer retirement as the cause of growing workforce non-participation and stop obsessing about an increase in discouraged workers.
4. The likelihood of those who left the labor force due to retirement or disability rejoining the labor force is small and has been largely insensitive to business cycle conditions in the past, suggesting that the decision to leave the labor force for those two reasons is more or less permanent.
“Nonparticipation due to retirement did not rise until the end of the Great Recession but started to increase significantly in 2010. Since the start of 2012, it has been the only component that has contributed to the increase in the nonparticipation rate,” he concludes.
“Although further careful analysis would be required to verify this conjecture, it highlights the difficultly of separating ‘cyclical’ from ‘structural’ forces in the sense that the wave of retirements, which creates a downward trend in the participation rate, is also affected by cyclical forces.”
So, what’s the bottom line?
“It is misleading to attribute the decline in the unemployment rate in the last few years to discouragement. The decline in the participation rate since the beginning of 2012 is entirely due to retirement.”
Originally published on BenefitsPro.com
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