Working Hard, or Hardly Working?

Why is the labor force shrinking?

That’s not exactly right: the labor force isn’t getting smaller, but as a percentage of the population, it is. The economy’s labor force participation rate had been rising steeply through the ‘60s, ‘70s, and ‘80s, rose more slowly in the ‘90s, and has been falling since 2000. Starting in ’08, it has been falling steeply. We now have the same percentage of our total population working as we had in the late ‘70s. Why?

Part of it is the retirement of the baby-boomers. Getting laid-off during the recession might be a good excuse to retire. Part of it is increasing college enrollment. Increasing your skills can be a rational response to a tough economy. Part is the economy. Participation falls during recessions.

But a big part of the fall in the participation rate is simply unexplained. It could be new technology—the robot ate my job. It could be the rise in expected marginal tax rates since the late ‘80s. Less return from working means less working. It could be a fall in demand for labor relative to capital, because the price of labor is rising and the price of capital is falling. We just don’t know.

Since the macro-data are inconclusive, economists and policy-makers should focus on micro-initiatives: lower tax rates here, cheaper labor costs there, incentives to keep working in another place. We have a natural economic laboratory in this country: it’s called “statehood.”

The fall in the labor force participation rate since 2008 means that 9 million workers and over $400 billion in economic output are being left on the table—more twice the output of the entire country of Ukraine. Encouraging people to work should be job one.

Douglas R. Tengdin, CFA

Chief Investment Officer

By | 2014-05-06T09:55:03+00:00 May 6th, 2014|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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