Review & Outlook

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What Does Weak U.S. Labor Force Participation Mean? Here’s a Guess.

26 March, 2014 by Matthew O'Brien, Ph.D. in Commentary

The Financial Times published some startling statistics yesterday about how the U.S. labor force participation rate has now dropped below that of the U.K.  The participation rate measures the proportion of adults (above 16 years old) who are either working or looking for work.  This is the first time in 36 years that a proportionately greater number of Britons than Americans have been working.

participation rate

The age cohort with the biggest difference of participate rates between the U.S. and U.K. is among “prime age workers.”  The FT reports, “among 25-34 year olds, UK participation is up from 84.3 per cent to 85.4 per cent between 2007 and 2013. Over the same period in the US, participation fell from 83.3 per cent to 81.8 per cent.” of adults (above 16 years old) who are either working or looking for work.  This is the first time in 36 years that a proportionately greater number of Britons than Americans have been working.  Economists only have speculative guesses about why the U.S. participation rate has dropped so much while Britain’s rate has remained relatively stable.  The U.S. rate began sliding in 2000 and fell drastically during the financial crisis of 2008-2009.  Since that time, 7.4 million fewer people are in the U.S. labor force, the FT reports.  This data will no doubt figure in the oracular proceedings of the Federal Reserve as it tries to manage the U.S. economy.

What does the difference in the labor force disparity mean and what is its cause?  Since the economists don’t really know, let me hazard a guess that I’ll leave it to the bean counters to verify or contradict:  the U.S. is so wealthy that, in comparison to the U.K., it can support a disproportionate number of people who aren’t working.  The huge baby boomer generation is beginning to retire.   Thanks to Obamacare, young people can now stay on their parents insurance until age 26, which decreases the pressure to find employment after college.  (Obamacare’s effect of decoupling healthcare benefits from employment  will probably result in an acceleration of this trend generally, as fewer people will need to work in order to pay for healthcare.)  Furthermore, the U.S. sends more and more young people to college and graduate school for longer periods of time.  According to the National Center for Education Statistics“Enrollment in degree-granting institutions increased by 11 percent between 1990 and 2000. Between 2000 and 2010, enrollment increased 37 percent, from 15.3 million to 21.0 million. Much of the growth between 2000 and 2010 was in full-time enrollment; the number of full-time students rose 45 percent, while the number of part-time students rose 26 percent.”

All of this means that more Americans are delaying taking their first job, more are leaving their final job, and more lower wage workers are being encouraged to quit.  It takes tremendous wealth to support such an opt-out from work by so many people.  The U.S. is wealthy, so we can afford it–for now.  Since much of the opting-out from work appears to be financed by debt–students loans, government deficit spending on entitlements–it’s not clear how sustainable it will be for the long term.

I’ll return to this subject next week with a post about some investing implications that might follow from changes in labor participation.