Submitted by Lance Roberts of STA Wealth Management,
Every month when the employment data is released there is an almost immediate debate that erupts over the Labor Force Participation Rate. Like any good boxing match, both sides take to their corners. Defenders argue the decline is primarily due to retiring "baby boomers" and demographic trends while opponents suggest that it is a sign that employment remains far weaker than headlines suggest.
As I discussed previously, recent employment increases, while encouraging have been little more than a function of population growth. As the population grows, incremental demand increases caused by that increase in population will create employment needs in areas most impacted by that population growth. This is why job formation has been primarily focused in retail, service and hospitality areas.
The Census Bureau and Bureau of Labor Statistics provide some fairly comprehensive data about employment that can help us understand the current state of labor force participation. Is it really just an issue of masses of baby boomers retiring? Or is it something potentially more structural in nature.
Let's start with the retirement of the boomer generation. Recent statistics show that the average American is woefully unprepared for retirement. On average, 40% of American families are NOT saving for retirement, and of those who are, it is primarily about one year's worth of income. Furthermore, important to this particular conversation, one-fourth of those at retirement age postponed retirement with only 18% being confident of having enough saved for retirement.
For the purposes of this analysis, I am going to exclude all of the "seasonal adjustments" that tend to be a focal point of many of the arguments and utilize a simple 12-month average to smooth the non-adjusted data.
With 24% of "baby boomers" postponing retirement, due to an inability to retire, it is not surprising that the employment level of individuals OVER the age of 65, as a percent of the working age population 16 and over, has risen sharply in recent years.
This should really come as no surprise as decreases in economic and personal income growth was offset by surges in household debt to sustain the standard of living. Notice that the surge in 65-year and older employment corresponds with the decline of prosperity in the chart below.
So, since we are now fairly certainly that a large number of individuals are working well into their retirement years due to financial reasons, what about employment participation for those of working age years 16-64. The chart below shows the 12-month average of employment as a percentage of those individuals of working age.
As opposed to the Labor Force Participation Rate that is widely discussed following each labor report, this chart shows that the participation rate of 16-64 year olds remained fairly stagnant between 1988 and 2008 ranging from 71-74%. This stagnation is very much due to the structural shift in employment makeup. However, while employment participation for 16-64 year olds declined sharply in 2008 due to the financial crisis, it has only mildly recovered over the last 5 years. It is here that the reality of job formation running at rates of population growth become clearly evident.
When the monthly employment data is released individuals that have given up looking for work are considered to no long be part of the labor force (Not In Labor Force or NILF). From 1977 through the turn of the century the 12-month average of the percentage of 16-64 year olds considered NILF, as a percentage of the total 16-64 aged population, had declined. However, since the bursting of the tech bubble and the financial crisis the number the percentage of individuals that dropped out of the labor force has grown sharply.
What seems to be missed by the majority of employment analysis, in my opinion, is whether the economic viability for the average American has improved? The fact the social benefits as a percentage of real disposable incomes has risen to an all-time record certainly suggests that it has not.
It would seem to me that this would be a much more salient question considering 70% of economic growth in the domestic economy is driven by consumption.
While the debate over the quantity of employment is sure to continue in the months ahead, the real issue should be quality. As I discussed recently in relation to the housing market:
"It is difficult to consider "buying" a home when full-time employment remains elusive. Full-time employment, which pays better wages and provides benefits, leads to increases in household formations and home ownership. A lack of full-time employment remains a major impediment to the recovery story."
The problem is that while the Fed has achieved a 6.3% unemployment rate it is clearly a hollow victory. This fact was not lost on Janet Yellen recently when she pulled Fed policy away from the employment mandate suggesting "much more work needed to be done." She is right. However, the problem is that Fed policy doesn't drive employment - employers drive employment which is only fostered through reduced regulations, taxes, and increased demand.
Bill Dunkelberg, NFIB Chief Economist, summed this up well when he stated recently:
"Small business confidence rising is always a good thing, but it’s tough to be excited by meager growth in an otherwise tepid economy. Washington remains in a state of policy paralysis. From the small business perspective there continues to be no progress on their top problems: cost of health insurance, uncertainty about economic conditions, energy costs, uncertainty about government actions, unreasonable regulation and red tape, and the tax code.”
Regardless of which side of the low labor force participation rate argument you stand on, it is hard to argue that it is simply a function of retiring "baby boomers." While political arguments are great for debate, it is the economics that ultimately drive employment. While the Fed has inflated asset prices to the satisfaction of Wall Street, as shown in the first table above, it has done little for the middle class. It is ultimately fiscal policy that will help business create employment, the problem is that businesses need less of it while government officials keep piling on more.
In the meantime, stop blaming "baby boomers" for not retiring - they simply can't afford to.