Employment: A decline in the participation rate was expected due to the aging population

Maybe the unemployment rate isn’t worse than it appears?

I’ve written extensively on the reasons for the decline in the participation rate. Unfortunately some people haven’t been paying attention.
Two key points:
• Some of the recent decline in the participation rate has been to due to cyclical issues (severe recession), but MOST of the decline in the overall participation rate over the last decade has been due to the aging of the population. There are also some long term trends toward lower participation for younger workers pushing down the overall participation rate.
• This decline in the participation rate has been expected for years. Here are three projections (two from before the recession started). The key to these projections is that the decline in the participation rates was expected:
1) From BLS economist Mitra Toossi in November 2006: A new look at long-term labor force projections to 2050
2) From Austin State University Professor Robert Szafran in September 2002: Age-adjusted labor force participation rates, 1960–2045
3) BLS economist Mitra Toossi released some new projections for the participation rate as of January 2012: Labor force projections to 2020: a more slowly growing workforce.
Click on graph for larger image.
Here is a graph of the actual overall participation rate and a few projections through 2040. The participation rate might increase a little over the next year or two, but in the longer term, the overall participation rate will probably continue to decline until 2040.
Once again, this is not a surprise. Sven Jari Stehn at Goldman Sachs put out a research note early last year arguing:

[T]here is little evidence for the idea that an “unduly” low participation rate is masking an even weaker labor market than indicated by the … unemployment rate. Instead, we find that most of the drop in participation in recent years reflects changes in the underlying demographics and the “normal” effects of the economic cycle (i.e., the fact that [the] unemployment rate in itself is very high).

Bottom line: If someone says the “actual” unemployment rate is much higher than reported because of the decline in the participation rate, they are unaware of a key demographic shift.
Friday on employment:
• September Employment Report: 114,000 Jobs, 7.8% Unemployment Rate
• Employment: Somewhat Better (also more graphs)
• All Employment Graphs
Yesterday:
• Summary for Week Ending Oct 5th
• Schedule for Week of Oct 7th

Employment: A decline in the participation rate was expected due to the aging population
Bill McBride
Sun, 07 Oct 2012 18:19:00 GMT