The Most Stubborn American Labor Force Issue

There is one stubborn issue in the American labor force that the Federal Reserve has been powerless to fix with their monetary alchemy; the disappearance of prime working age men from the workforce.  What is particularly interesting is that this disappearance has continued, unabated during both economic expansions and economic contractions, crossing the boundaries that separate generations of workers.

Here is a graph from FRED showing the labor force participation rate for men between the ages of 25 and 54 going back to 1948:

At 69.3 percent, the current male labor force participation rate is 18.1 percentage points below its peak of 87.4 percent seen back in October 1949 and 3.9 percentage points below its level of 73.1 percent experienced in December 2007, just as the Great Recession began.  You can also see that, since the Great Recession, the contraction in the prime-age male labor force participation rate accelerated substantially, particularly during the period from 2009 to 2011.

Here is a graph showing the same data with the year-over-year percent difference since 2000:

As you can see, the participation rate of prime-age males dropped by as much as 2 percent on a year-over-year basis after the Great Recession, a rather remarkable contraction.  

Here is a graphic showing the dropping employment rate for prime-age males between 1955 and 2014:

At the most recent rate of 83.6 percent, the employment rate for prime-age males has fallen by 11.1 percentage points from its 1967 peak of 94.7 percent.  During the period immediately after the Great Recession, it fell further to a 55 year low of 80.9 percent.

Here is a graphic showing the percent of prime-age men who are currently not in the labor force who did not work at all in the past year:

Here is a graphic showing how the United States is an outlier when it comes to the dropping labor force participation rate for prime-age men when compared to its OECD peers:

The United States had the second largest decrease in prime-age male participation among OECD peers and now ranks in third last place out of 34 when it comes to prime-age male labor force participation.

And, last of all, here is a graphic showing how the prime-age male labor force participation rate varies with race and ethnicity:

According to a 2016 study by the Executive Office of the President of the United States, the drop in male prime-age labor force participation is linked to educational attainment.  In 1964, 98 percent of prime-age men with a college degree or more were part of the labor force compared to 97 percent of men with a high school diploma or less.  By 2015, the rate for college-educated men had fallen slightly to 94 percent while the rate for men with a high school education or less had plunged to 83 percent as shown here:  

As I noted at the opening of this posting, this evolving phenomenon has developed through at least three generations and will have a significant impact on the American economy on a going-forward basis.  This issue is a grave concern for America of the future since these out-of-work men will not be contributing to the social safety net that has been promised by Washington, nor will they be saving for their own futures.  While it appears that at least some of the problem was created by the gutting of America's manufacturing sector, traditionally the haunt of prime-age men with less formal education, it is unlikely that manufacturing jobs will return to the United States any time soon.  From the data in this posting, it seems that the monetary alchemy practiced by the Federal Reserve will continue to have no impact whatsoever on the unemployment crisis facing millions of prime-age male American workers, perhaps one of the greatest economic issues of the new millennium. 

Exiting the Workforce - A Growing Pastime for American Men

A study by the Council of Economic Advisors for the Office of the President looks at a critical factor in the current labor force; the decline in the labor force participation rate for prime-age males between the ages of 25 and 54.  This is the age range where workers are at their most productive and the decline in the participation rate is worrisome for both the financial well-being of men and their families as well as for the economy as a whole.  Please keep in mind that the labor force consists of men that are either working or actively seeking work.

Here is a chart showing how the labor force participation rate for prime-age men has dropped since 1948 with recessions marked with vertical grey strips:

The male prime-age labor force participation rate declined from its peak of 98 percent in 1954 to around 96 percent in the mid-1960s and began to decline significantly between 1965 and 1975 when it dropped from 96.7 percent to 94.2 percent.  From that time forward, the participation rate dropped during and after each recession, declines that were not fully reversed with each subsequent economic expansion.  Since 1965, the prime-age male labor force participation rate has declined by an average of 0.16 percentage point each year, to its current level of 88 percent.  In the latest economic cycle, the rate of labor force participation for prime-age men dropped from 91.5 percent in January 2007 to 87.9 percent in October 2013 and has barely budged upwards since, ranging from 88 to 89 percent. 

Not only has the prime-age labor force participation rate dropped but a significant majority of the men who reported that they are not part of the labor force in a given month also report that they have not worked in the previous year.  This level has gradually risen over the past two decades as shown on this graphic:

In large part, the increase in male non-employment is affiliated with less-educated men.

Let's look at the global picture, showing how bad the situation is in the United States compared to other advanced economies (i.e. OECD nations) using data points from 1990 and 2014 for comparison:

Since 1990, the United States has had the second largest decrease in prime-age male participation among all OECD nations with the United States ranking third lowest among all 34 nations in the group compared to 10th lowest out of 24 in 1990.

Interestingly, as well, if we compare the prime-age male non-employment in the United States to its OECD peers, we see that it is rather high:

Who are the prime-age male labor force non-participants?  While prime-age male participation has dropped right across all demographic groups, it has fallen more for younger birth cohorts, African Americans, the less-educated, non-parents, native-born, those living in the South and veterans.  What is surprising is that the overall trend of rising educational level should have led to increases in labor force participation rates.

Here is a graphic showing how prime-age male labor force participation has changed between 1971 and 2015 by race and ethnicity:

...and by education:

Note that the percentage of prime-age men with a high school diploma or less fell from 97 percent in 1964 to 83 percent in 2014.

Why has there been such a substantial decline in the prime-age male labor force participation rate?  Let's look at some reasons that only partially explain the issue.  Over the period from 1985 to 2015, the share of non-participating prime-age men has fallen from 28 percent to 16 percent suggesting that at least some men do not want to work at the jobs that are available.  As well, prime-age males are providing only a portion of household income with spouse's earnings helping to meet household financial demands.  This logic is not completely solid since fewer than 25 percent of prime men who are not in the workforce have a working spouse.  The authors of the study also note that it appears that men and women who are successfully employed tend to pair up with others who are successfully employed rather than those who are not.  Another hypothesis suggests that prime-age men are staying at home more often to participate in household duties.  By examining the American Time Use Survey, the authors found that there is little evidence that men who stay at home are spending any more time on household duties than their employed counterparts. 

The one key factor that appears to explain much of the drop in prime-age male participation is connected to the declining labor market opportunities for low-skilled labor and the resulting stagnation in real wage growth.  As well, middle-skilled workers began to displace lower-skilled workers during the 1990s.  Some of this is due to technological changes in the workplace as well as international trade deals that have decimated the manufacturing sector since 2000 when China was admitted to the World Trade Organization as shown on this graphic which shows manufacturing employment as a share of total non-farm employment between 1939 and 2016:

As well, when compared to its OECD peers, United States labor markets are much less "supportive"; the U.S. spends 0.1 percent of GDP on policies such as job search assistance and job training compared to the OECD average of 0.6 percent of GDP putting the United States in third last position ahead of only Chile and Mexico.

The drop in the prime-age male labor force participation rate will have a significant impact on the American economy and household finances in the future.  Males between the ages of 25 and 54 are at their earning prime, a period when they should be setting aside funds for their retirement and paying down their mortgages. Obviously, with a decrease in the prime-age male participation rate, the "normal" progression from worker to retiree will be difficult for an increasing number of households.

The Federal Reserve's Failed Employment Mandate

Updated June 2016

The mainstream media has spent a great deal of energy questioning whether the Federal Reserve should continue to resume interest rate increases during 2016.  With the global economy looking rather shaky at best and the United States economy looking positively glowing when compared to its peers even though it is expanding at modest levels, the Fed is finding itself caught between a "monetary policy rock and hard place".  As we all know, one of the Fed's mandates as established by Congress is to maximize employment.  While the drop in unemployment from ten percent in October 2009 to its current level of five percent, it looks like the Fed has succeeded in meeting at least one part of its obligations, however, scratching slightly below the surface of the headline U-3 unemployment rate, we find that the Fed's long-term monetary policy experiment has been less than a resounding success when it comes to employment for America's prime-age workers.

Here is a graph from FRED showing the employment-to-population ratio since the late 1940s to help us put the current ratio into perspective:

Here is the same data for the period from the beginning of 2004 to the present:

The employment-to-population ratio is defined as the ratio of total civilian employment to the civilian non-institutional population.  It is used to track the pace of job creation and compare it to the rate of growth in the adult population.  As you can see, there was a precipitous drop in the civilian employment-to-population ratio during the Great Recession, from a pre-recession peak of 63.4 percent to a low of 58.2 percent in both 2010 and 2011.  Since its low point, it has only improved to its current level of 59.7 percent, an improvement of only 1.5 percentage points from its lows.  A 2015 analysis by the Congressional Research Service  suggests that demographics are playing a significant role in this stubborn decline for two reasons:

1.) retirement of older workers (i.e. the baby boom generation).

2.) younger workers pursuing or extending their education.

As a result, one would expect that if younger and older workers were subtracted from the employment-to-population ratio, the ratio for prime-age workers between the ages of 25 and 54 would show that there is little remaining impact of the Great Recession, particularly given the Fed's massive interference in what passes for the free market.  With that in mind, here is the data from FRED showing what has happened to the employment-to-population ratio for prime age workers since the beginning of 2004:

The ratio for prime-age workers hit a high of 80.3 percent at the beginning of 2007 and fell to a low of 74.8 percent in late 2009 and 2010.  Since then, it has recovered to its current level of 77.7 percent, an improvement of 2.9 percentage points, however, it is still 2.6 percentage points below its pre-Great Recession peak.  

Let's do a bit of an analysis of the data:

Low point - 74.8 percent in November 2010

Current level - 77.7 percent in April 2016

Total Change - 2.9 percentage points

Time elapsed - 66 months

Average monthly improvement - 0.044 percent per month

As long as there is no economic slowdown or sudden economic growth spurt, it will take another 59 months for the prime-age employment-to-population ratio to return to its pre-Great Recession level.

This begs the question - how successful has nearly seven and a half years of Federal Reserve monetary policy really been when it comes to meeting at least one of its congressionally-mandated obligations?  It would be my guess that millions of prime-age American workers would unequivocally state that the Fed and its long monetary policy have been an unqualified failure and that additional interest rate increases should be off the table.