How Demographics Hold Back U.S. Job CreationA. Gary Shilling
July 23 (Bloomberg) -- The U.S. unemployment and underemployment picture isn’t as extreme as the statistics I discussed yesterday would indicate.
Labor-force participation rates tend to drop as people age and retire or otherwise leave the workforce. For the postwar generation, born between 1946 and 1964, this has resulted in a downward trend in the total participation rate, which was 63.5 percent in June, compared with 67.4 percent in early 2000, but it doesn’t account for all of the decline.
Participation rates of younger people, though they are declining, tend to be higher than for senior citizens. For 16-to 24-year-olds, the rate has declined sharply since 2000 as slow economic growth, limited jobs and rising unemployment rates have encouraged them to stay in school or otherwise stay out of the labor force. The participation rate jumps with age, from about 55 percent for the 16 to 24 group, to 80 percent or higher for those in the 25 to 34, 35 to 44 and 45 to 54 groups. Yet even for these demographics, the participation rate is declining, and unemployment rates have risen on balance since 2000.
Because of early retirement, the labor-force participation rate for 55- to 64-year-olds, about 65 percent, is lower than for the three younger age groups. Participation among 55- to 64-year-olds has been mostly unchanged in recent years, even though unemployment for this cohort has increased on balance.
The unemployment rates for 65- to 75-year-olds and for the 75 and older have also risen, but their participation rates have climbed since the late 1990s because they have been forced to work longer than they had planned. Many in these age groups have been poor savers and were devastated by the collapse in stocks from 2007 to 2009 and after the 2000-to-2002 decline, two of only five drops of more than 40 percent in the Standard & Poor’s 500 Index since 1900.
In addition, older Americans were affected by a collapse of more than 30 percent in house prices, which wiped out the equity that many had counted on for retirement. Even with the increase in house prices in the last year, 20 percent of home mortgages remain more than the homes are worth.
Furthermore, increasing life spans mean many older people are able to work longer, curtailing job opportunities for younger people.
The rising participation rate for older people is a relatively rare break in a downward trend: In the 1880s, 78 percent of men 65 and older worked; in 1990, that figure was 16.3 percent. It bounced back to 22.1 percent in 2010. Interestingly, when Social Security was enacted in 1937, the life expectancy for American men was about 65 --- the required age for drawing benefits. Now, life expectancy is 76.3 for men and 81.1 years for women, but the eligibility age to collect full benefits has risen to only 67.
Nevertheless, the U.S. now ranks only 17th in life expectancy among developed countries. And that’s true even for wealthier, college-educated Americans. The U.S. is plagued by high rates of obesity and diabetes, heart and lung disease, as well as drug-related deaths and sexually transmitted diseases, infant mortality, injuries, homicides and teen pregnancies. A study in the Journal of the American Medical Association found that though people are living longer, they’re also experiencing more years living with disabilities.
The primary reason for the shorter U.S. life expectancy, however, is the high mortality of men under 50 because of accidents and violence. Also, women’s life expectancy gains have fallen behind those of other rich countries. The U.S. spends more on health care than many other advanced countries, but lags in effectiveness. Nevertheless, Americans who live past 75 have higher life expectancies than people in many other similar countries.
The participation rates for older people are relatively low, 26.6 percent for 65- to 74-year-olds and 8.4 percent for those over 75, but they are rising. Also, the share of the population over 55 is climbing; the first of the postwar babies turned 65 in 2011. So, younger people have higher but falling participation rates, while those for older Americans are lower but rising. The decline in the total participation rate is partly due to demographics -- the aging of the population -- and partly due to other factors, principally the poor job markets in the last two decades.
In the 1970s and 1980s, the participation rate was hyped by more working women (a trend that’s diminishing) and the baby boomers were entering the prime working ages of 25 to 54. The oldest members of this group entered this category in 1971, but by 1989, they had all been absorbed into the workforce. In 2001, the oldest of the boomers turned 55, and in 2019, they will all be out of their prime participation rate years.
The average participation rate for the 25- to 54-year-olds has been in the 80 percent to 85 percent range since 1991, while for 16- to 24-year-olds and 55- to 64-year-olds, it was 55 percent, and it was less than 30 percent for those 65 and older.
Considering that the oldest boomers started to enter the 65-plus age bracket in 2011 and the youngest members are only 49, I expect the age-related effects of the labor force participation rate to continue to decline as more and more boomers retire. That means we could see the total participation rate drop below 60 percent in the next 20 years, compared with 63.5 percent today and 67.4 percent in early 2000.
Those still working would have a lot more retirees to support through Social Security and Medicare, and by producing the goods and services the older folks still consume. This effect of an aging population is a serious concern for all developed countries, but most significantly for Japan, where people live longest and there is no immigration.
In contrast, the U.S., along with Canada and Australia, is relatively open to immigrants, and because these new arrivals tend to be younger, they help support retirees. Note that the ratio of working-age people to retirees is dropping in all Group of Seven countries, but is moving toward much lower levels in Japan (to 1.5 by 2040, according to the United Nations) and Europe (below 2 in many instances) than in the U.S. (2.9 by 2040) and Canada (2.5).
Nevertheless, labor-force participation rates for older age groups will continue to increase in coming years as the baby boomers are forced to reconcile their low retirement savings with increased life spans and rising medical costs. Social Security and Medicare will probably provide less of a safety net as Congress is forced to deal with rising entitlement costs. This is already evident from the rising participation rates for those 55 and older in recent years.
My company’s research shows that from February 2000 to June 2013, demographics accounted for 2.5 percentage points of the 4-point decline in the overall participation rate, from 67.4 percent to 63.5 percent.
About 1.6 percentage points of the decline in the total participation rate was due to nondemographic reasons by young and middle-aged people. Many younger people have been in college, especially since the recession began in 2007. There has been a rise in enrollment of both 14- to 24-year-olds and 25- to 34-year-olds in college and graduate schools since then.
But with college tuition and fees continuing to rise, and with costs for private schools exceeding public ones, many students are opting for public colleges, as discussed in my July 2012 Bloomberg View columns.
Yet many recent college graduates with soft majors like sociology from all but the top schools find themselves with huge student debt and can only find low paying jobs, if any.
About half of recent graduates are working in jobs that don’t require a college education, and surveys show that the income of those who are unemployed or underemployed in the first few years after graduation never catches up with those who immediately found well-paid positions.
Many young people and their parents may decide that financially straining for a college degree that leads to high debt and grim job prospects is a poor choice. They may decide that junior college-apprenticeship programs leading to skilled trades such as computerized machine operations or plumbing are better matches for their abilities and promise much higher incomes.
At that point, the number of people who are out of the labor force for nondemographic reasons may fall. Meanwhile, many young and middle-aged people have simply dropped out or taken part-time jobs.
(A. Gary Shilling is a Bloomberg View columnist and president of A. Gary Shilling & Co. He is the author of “The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation.” This is the second in a three-part series. Read Part 1 and Part 3.)
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