Decline in Prime-Age Workers Signals Economic Weakness

The last Bureau of Labor Statistics employment report before the election brought some decent news. In October, the economy added 161,000 jobs and the unemployment rate held steady at 4.9 percent.

However, the long-term picture for the economy was more mixed. The labor force participation rate, or the share of Americans working or actively looking for work, declined slightly to 62.8 percent. The employment-population ratio, defined as the share of the population working, was just 59.7 percent—down from 63.3 percent ten years ago.

While commentators tend to focus on the unemployment rate—which is moderate at 4.9 percent—the employment-population ratio is arguably more informative. After long spells out of a job, people may become discouraged and give up looking for work altogether. A large group of working-age, able-bodied individuals outside the labor force is a sign of major weakness in the economy.

However, some of the decline in the employment-population ratio over the past decade is due to the aging (and retirement) of the population; indeed, this is often used as an excuse to claim the economy is doing better than it really is. To test this argument, I calculated what share of the 3.7 percent decline in the employment-population ratio since 2006 can be explained by changes in each of seven age groups.

A little less than half of the decline in the employment ratio is explained by those over 65. People are aging into 65+ age groups faster than they are being replaced, and these groups have much lower employment ratios than younger groups. In other words, people are retiring.

The other half of the decline in the employment ratio is much more troubling. Fully 21 percent of the decline is explained by workers aged 16 to 24. While some of these are undoubtedly pursuing higher education, studies have shown that higher minimum wages have also depressed employment among this age group.

Another 28 percent of the decline is due to prime age groups: those aged 25 to 54. There are no excuses for this; the weakness of the economy is entirely at fault. Had the employment-population ratio for prime age groups stayed constant since 2006, 2.7 million additional working-age people would have jobs today.

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