8/18/2012

Is David Leonhart right that changing demographics explain the weak economy?

In a recent post on the economix blog, David Leonhart claims that it is the reduction in share of the population that is working that is causing the reduction in GDP and that this reduction in share is due to demographics.  Do I agree that a lower job participation rate means lower GDP?  Sure, that is obviously true.  The question is whether changing demographics can explain the drop in the share working, and it is there that I think is wrong.
The share of Americans who are working age — old enough to be out of school but young enough not to be retired — is no longer growing. Only about 53 percent of the population was between the ages of 25 and 64 last year, unchanged from 2007 and up only slightly from 52 percent in 1997. Between 1967 and 1997, by contrast, the share grew 8 percentage points, to 52 percent from 44 percent. As more baby boomers retire, the share will begin to fall. . . .And aging isn’t the only demographic weight holding back the economy. For most of the 20th century, the share of women in the labor force was rising. It reached 60 percent in 1997, up from just 32 percent in 1948. . . .
I think that a simple graph easily shows that it that demographics can't explain the slow growth.  The drop in labor force participation started in the middle of 2008, but accelerated in June 2009, ironically when the recovery supposedly started.  There are simply no demographics that suddenly started changing so much right in the middle of 2009.  Leonhart raises the issue of an aging population, but that is the reason that I show a graph of the participation rate among the working age population, so large group of people suddenly reaching the normal retirement age can't explain it.  During the recovery, a lot of people have retired early, but that is not the same as a change in demographics.


Drawing a graph for the labor force participation rate for women tells an even more dramatic story.  Again, this drop occurs right when the recovery (falling almost one percentage point between June and December 2009).  It is true that women's participation rate has gone down, but you can't look at this graph and just believe that it can be explained by a huge sudden change in demographics.  In this case, if Leonhart's explanation were right, one would have to believe that the drop was due to a sudden increase in women's share of the working age population, but both men and women's shares of the working age population are both suddenly falling, especially that for women.
UPDATE: Steve Bronars tweets:
@JohnRLottJr @DLeonhardt especially declines within age/gender group. Age 55+ only grp w increasing participation-may be delayed retirement.
(the 2020 numbers are estimates)
In other words, the aging population can't explain the drop as participation rates due to an aging population because the participation rate is actually rising among older workers.  In addition, the participation rate has fallen across all working age men more than it has fallen across all working age women.  The increased participation rates for the elderly shows how they are delaying retirement.

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