Trends in the Aggregate Labor Force
Matheny, Kenneth J., Federal Reserve Bank of St. Louis Review
Trend growth in the labor force is a key determinant of trends in employment and gross domestic product (GDP). Forecasts by Macroeconomic Advisers (MA) have long anticipated a marked slowing in trend growth of the labor force that would contribute to a slowing in potential GDP growth. This is reflected in MA's forecast that the aggregate rate of labor force participation will trend down, especially after 2010, largely in response to the aging of the baby boom generation, whose members are beginning to approach typical retirement ages. Expectations for a downward trajectory for the participation rate and a slowing in trend labor force growth are not unique. However, this article reports on MA research suggesting that the opposite is possible: that the slowdown in trend labor force growth could be relatively modest and that the trend in the aggregate rate of labor force participation will decline little, if at all, over the next decade. (JEL E01, J11)
Projections of population and labor force growth are essential elements of any projection of the economy's potential output growth. Often, however, these projections are driven primarily by trends and dummy variables. The research reported here constructs a labor force projection from a much richer set of behavioral determinants of labor force trends than are typically used. The set of determinants also is richer than that contained in the aggregate labor force equation that appears in the current version (as of this writing) of the Macroeconomic Advisers (MA) commercial macroeconomic model.
In its September 24, 2008, issue of Long-Term Economic Outlook, MA projected that the labor force participation rate would decline by about 1 1/2 percentage points over the next decade--to 64.6 percent in 2017--and that the growth of the labor force would slow from roughly I percent or a little higher on average in recent years to an average of 0.6 percent from 2013 to 2017 (Tables 1 and 2). These estimates are comparable to recent estimates from the Congressional Budget Office. However, they are considerably stronger than trend estimates in a recent paper by Aaronson et al. (2006). Their research suggests that demographic and other developments could result in a much larger decline in the participation rate--to 62.5 percent by the middle of the next decade--and a reduction in trend labor force growth to just 0.2 percent from 2013 to 2015.
The research summarized here leans in the other direction. It suggests that trend growth of the labor force might not slow as much over the next decade as previously anticipated. According to the model, the trend in labor force growth will edge down slightly to an average of 0.9 percent through 2017, and the trend in the labor force participation rate will dip only slightly from recent levels to average just under 66 percent from now through 2017. The research reported here updates our measure of the pure demographic contribution to the change in the labor force to reflect more age detail than in our existing model and to match the population concept on which it is based with the one that underpins the official estimates of the labor force and the participation rate from the Bureau of Labor Statistics (BLS). The updated model addresses a bedeviling problem with discontinuities in the official estimates of the labor force and the civilian noninstitutional population. Unfortunately, data limitations prevent the complete elimination of the spurious impacts of these discontinuities, which stem from updates to "population controls" that are entered into the official data in response to the results of decennial censuses and for other population-related data.
The research reported here shows a much richer set of behavioral determinants of labor force trends than are contained in the equation for the aggregate labor force that appears in the MA commercial model at the time of this writing. Specifically, this analysis drops previously used deterministic trend and shift terms; instead, the model includes a small set of factors believed to exert important behavioral influences on the labor force. …