Hypothesis, not a fact

Nonetheless you should take it very seriously:

In recent months, though, the third story about demographic change has gained ground. The only way to address it is with a model that compares the decline in labour participation against some kind of trend. Dean Maki of Barclays Capital is one economist who has done so. “Our analysis indicates that the single biggest factor dragging the labour force participation rate down has been the retirements of the baby-boomers,” he says.

Of a 2.8 percentage point fall in labour force participation since 2002, Mr Maki estimates that 1.6 points are due to demographics and only 0.9 points to the economic cycle. As the demographic decline will continue at 0.3-0.4 points a year, his calculations suggest all of the “cyclical” decline could be gone within a couple of years if only modest numbers return to work.

“To the extent this trend is not fully recognised by the Fed, it does raise the risk of greater wage and price inflation sooner than the Fed expects,” says Mr Maki. “The other implication for policy makers is that potential growth in GDP is a lot weaker – we’d put it no higher than 2 per cent – and so budget forecasts are for too rosy a picture.”

Others who have done similar work do not find such large declines. A recent Chicago Fed paper puts the demographic element at a quarter of the total drop and the Congressional Budget Office also projects a slower pace of demographic decline. Much depends on assumptions about whether more of the elderly will choose to work. But Mr Maki points to a sharp rise in workers receiving Social Security and to the numbers aged 55-plus who are not in the labour force and say they do not want a job.

David Greenlaw of Morgan Stanley adds another element: he estimates that 0.3 percentage points of the decline in participation is because unemployed workers have moved on to disability benefits. It is hard to become certified as disabled and, once on the benefit, few workers go back. “There has been a large increase in the number of long-term unemployed and many of these people will have a difficult time reattaching to the labour market,” says Mr Greenlaw. “It seems that many of them are shifting from unemployment benefits to disability insurance benefits.”

That is all from Robin Harding.


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