Labor Force Participation

The two candidates for president in this fall’s election had very different perspectives on last Friday’s jobs report.  President Obama pointed to the 26th month in a row of private sector job gains and the  cumulative four million job gain over this period.  On the other hand, putative Republican nominee Romney assailed the paltry 115,000 nonfarm payroll gain and claimed that job gains should be several hundred thousand per month greater at this stage of the business cycle.

Who is right?  Well, in a sense, they both are.  The President is surely correct that there has been net growth in jobs over each of the past 26 months.  But Governor Romney is also correct in noting that in a typical economic recovery job gains have historically been much stronger than the tepid 150,000 pace of the past year or two.  We are now almost three years past the end of the recession, and the number of jobs is still four million below the pre-recession level.  The current recovery has been subpar, at best.

The unemployment rate in April ticked down from 8.2 percent to 8.1 percent.  To the Democrats, this represents improvement.  To the Republicans, this level of unemployment is way too high and even then is under-estimated due to the effects of people leaving the labor force (when people who are unemployed quit looking for jobs and leave the labor force, the reported unemployment rate declines).  Democrats acknowledge that there have been many people leaving the labor force, but they attribute this largely to normal retirement for baby boomers.  The oldest boomers (baby boomers are those born between 1947 and 1964) reached the age of 60 five years ago and 65 this year.  Thus, it is reasonable to expect that the numbers of retirements should have been increasing in recent years, and will remain elevated for the next ten to twenty years.

Republicans argue that boomer retirements can’t be the whole story.  Today, the labor force is smaller than it was before the recession began.  Given normal population growth of approximately 1% per year, we might expect that, absent an increase in discouraged workers, the labor would have grown by six million over this period.  But this argument does not really address the boomer retirements.   The average birth rate between 1947 and 1964 was 4.1 million per year.  These are the folks who are now leaving the work force.  Sure, many boomers will attempt to prolong their working lives due to low savings and recent lackluster returns on investment.  This may slow but will not prevent work force departures.  A high rate of exit will persist for the next fifteen years.  Meanwhile, the average birthrate for the years 1992 to 2009 (roughly, the birth years for native born new entrants to the labor force to replace the departing boomers) was just 4.0 million.  Thus, absent positive net immigration, the labor force will be shrinking over the next decade or two!

What about immigration?  This has been a substantial net positive over the past few decades but has slowed to a trickle in recent years.  The bottom line is that the arguments of both parties have a ring of truth:  some of the weakness in labor force growth has been due to discouraged workers leaving the labor force, and the effect of boomer retirements is substantial and will become greater in coming years.  This demographic argument supports the case for improving the process for legal immigration.  Many talented, well-trained and entrepreneurial people want to enter the U.S. but are constrained from doing so.  Does either party have a solution for this?

You must be logged in to post a comment.