Monday, February 6, 2012

Employment participation rate shows a troubling trend

One reason to remain cautious on the recent strength in the US employment indicators is the rapid decline in the employment participation rate (chart). We are at the levels not seen since the early 80s.

Proportion of the US population that is in the labor force (Bloomberg)

This is telling us that Americans are dropping out of the workforce at a fairly rapid rate. Some may argue that this is simply a result of aging US population - as more people retire, a smaller portion of the population is working. The US is not Japan with respect to the speed of population aging, but the demographics certainly support this theory - the proportion of those who are 55 and older has been on the rise since 1999.

Source: Credit Suisse
However this does not tell the full story. Yes, the population is aging, but if one looks at the sources of employment participation decline, the older group is not the main contributor.

Employment participation rate by age group (Source: Credit Suisse)

This data is a bit dated, but the trend is unmistakable - the declines have been coming from the two younger groups. It is possible that the older group may even be contributing positively to employment participation as people end up having to work longer before retiring. This means that the sharp decline in the employment participation rate has to be taken into account when considering the recent improvements in the unemployment rate as well as the US jobless claims.
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