Oregon Office of Economic Analysis

Along with the latest employment report came the news that Oregon’s labor force participation rate fell to at least a four decade low. We have good data going back to 1976 and June’s LFPR of 60.3% is the lowest in this data. However, much of the decline in the past 15 years was expected. Given that LFPR includes all Oregonians 16 years and older, aging Baby Boomers were always going to pull the measure down.

The graph below shows the actual LFPR in red compared with a demographically-adjusted LFPR which takes participation rates in 2000 (arguably the last time the U.S. economy was operating at full capacity) and then adjusts for demographic changes. As such the gray line is a reasonable approximation for what the LFPR in Oregon would be if the economy was firing on all cylinders. What truly matters for the health of the economy is the difference between the red and gray lines. This is the so-called participation gap our office uses in the Total Employment Gap. This gap is what I am most worried about economically as the expansion continues. To what extent will this gap close? I also highlight the last benchmarked data point (the most recently revised data, essentially.) Data since then shows the LFPR plummeting further. With the Oregon economy on the upswing and job growth at full-throttle, it’s hard for me to see such large declines in the LFPR. We shall see what revisions bring next year…

Since about two-thirds to three-quarters of the LFPR decline since 2000 is due to changes and trends among the youngest and oldest populations, I want to focus on just the so-called prime working age folks, those between ages 25 and 54 years old. Participation rates are down among this group, which is the biggest potential issue in terms of future growth as fewer workers generally equals lower productive capacity overall. The chart below shows the relative changes for this population and the reason they’re not in the labor force over the past decade or so. This also adjusts for demographics, so even though there are more 25-34 year olds today with the Millennials, they are enrolled in higher education at an even higher degree. I have ordered the reasons why these Oregonians are not in the labor force from most likely to least likely to return, from left to right.

The results here are a mixed bag, not surprisingly. The youngest group (25-34) has seen less LFPR for reasons that are fairly easy to reverse: school, weak economy and staying at home with the kids (an overall upward trend as our office’s report showed.) Changes among the oldest group (45-54) appear to be harder to reverse, although a stronger economy can and will pull some of these workers back into the labor force. Side note on the ill or disabled group, this reflects survey responses not actual disability claims and awards. If you look at age-adjusted SSDI there was an uptick during the Great Recession but history has shown it is not likely to be a permanent trend. The 35-44 year old group lies somewhere in between the others, although certainly skewing more toward the easy to reverse end with more discouraged workers and an increase in staying at home with the kids. Not that transitioning back into the workforce is easy, but provided the right opportunity exists — and it should in a stronger labor market — these individuals will at least be tempted to return.

All told the bulk of the LFPR decline is due to basic demographics. As such it is expected to continue to fall over the coming decade as well. What truly matters is the participation gap. This does mean that at least some of the LFPR decline is economic-related and should be cyclical to a certain extent.

In terms of the outlook there are three reasonable scenarios. First, the truly pessimistic scenario is that all of the LFPR decline is permanent. The economic-related decline is now structural and not cyclical due to the initial lackluster recovery. Those Oregonians who dropped out of the labor force will not return in the future. Our office does not believe this will happen, but, unfortunately, it does remain a distinct possibility. Second, a somewhat pessimistic yet reasonable view would be that Oregon does not see any uptick in the LFPR. Rather it moves sidewise during the expansion, similar to the 2005-08 period. Under such a scenario, the participation gap will narrow and maybe even close however not quickly. Finally, our office’s baseline is that Oregon will see another percentage point or so increase in the LFPR, following the gains in 2014. A stronger economy with more plentiful and better paying jobs will pull workers back into the labor force, at least somewhat. Not enough to overcome the aging demographics, but some of those prime working age adults will return.

For more see the Oregon Employment Department’s report on LFPR.