Are Baby Boomers Responsible for the Low Labor Force Participation Rate?

A new government report says boomers have caused the drop in labor participation since 2007

Jul 27, 2014 at 11:31AM

Flickr / Andreas Klinke Johannsen.

The national unemployment rate has been steadily decreasing since early spring, while a vital component of the employment picture has remained unchanged: the labor force participation rate. Even as unemployment has dropped to a low not seen since the waning days of summer 2008, the participation of citizens in the workforce has stayed stuck at 62.8% -- a rate not seen since the late 1970s. 

A more precipitous decline has occurred since 2008, which is often attributed to the Great Recession and the effect of the baby boomer generation entering retirement. How much of this decrease is due to the latter cause? According to a new paper from the White House Council of Economic Advisors, boomers account for the lion's share of the drop in the labor participation rate.

Retirement v. financial crisis
The CEA notes that 2008 released two storms upon the nation's workforce: the financial crisis, and the first wave of baby boomers taking early social security benefits at age 62. The paper notes that from the last quarter of 2007 until the second quarter of this year, the labor force participation rate has fallen by 3.1 percentage points.

Researchers, for the most part, have ascribed about half of that decrease, or 1.6 percentage points, to baby boomers leaving the workforce. The CEA agrees with that theory, and posits further that one percentage point is due to "other factors", such as a gradual decline in the labor participation rate for most age groups since 2000, as well as the Great Recession. The last 0.5 percentage point is, basically, people giving up on finding work.

Too much emphasis on boomers?
I generally have great faith in the abilities of government number-crunchers, but these percentages seem skewed. After all, boomers made up less than 25% of the total U.S. populace in 2012, and the age group with the highest historical work participation – 25 to 54 years – only includes a few years' worth of boomers. How, then, could they be having such a disproportionate effect upon the labor participation rate? 

Personally, I feel that the study puts too much emphasis on baby boomers' retirement behavior, without considering how much of the falling labor rate is due to the effects of the Great Recession. The Bureau of Labor Statistics notes that, for instance, the labor participation rates of those aged 25 to 54 years decreased from 76.4% in 2002 to 70.9% in 2012 – while the rates of those aged 55 and over actually increased over the same time frame, from 61.9% to 64.5%.

Similarly, those aged 55 to 64 saw their workforce participation rate jump by 2.6 percentage points over the same decade, from 61.9% to 64.5%. Even those of traditional retirement age, 65 to 74 years, increased their participation to 26.8% from 20.4%. BLS estimates this particular segment to continue in this direction, with a projected participation rate of nearly 32% by 2022.

It seems to me that boomers have continued to work, at least in part, because of the detrimental effects of the last recession. Recent Gallup polls show that 39% of boomers plan to keep working at least until age 66, and that 68% of those aged 50 to 64 worry about having enough money to last through their retirement.

The study concluded that the depressed labor participation rate is here to stay, and no doubt, that is correct. While an aging population surely has something to do with the permanently low rates, I think that the economic maelstrom of the past six years needs to take more of the blame.

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4 in 5 Americans Are Ignoring Buffett's Warning

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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