In the beginning of 2018, the US employment-population ratio—the share of the civilian population ages 16 and older that is currently working—had recovered to its pre-recession level on an age-adjusted basis. By the fourth quarter of 2018, it was 0.5 percentage points higher. Without adjusting for the effects of aging, the employment rate was still 2.2 percentage points lower than before the last recession.
The improvement in the age-adjusted employment rate over the last decade reflects very disparate experiences by age group and by sex. Improvements in employment for those ages 55 and older (+2.4 percentage points on an age-adjusted basis) have outweighed reductions for those ages 16 to 24 (-2.9 percentage points on an age-adjusted basis). (Because the population ages 55 and older is more than twice as large as the population ages 16 to 24, the increase in employment rates for the older group has a bigger effect on the aggregate employment rate than the somewhat larger percentage decrease in employment rates for the younger group.) Employment rates have been roughly flat for those ages 25 to 54, increasing by just 0.1 percentage point over the period. Meanwhile, the entire improvement in the age-adjusted employment rate is attributable to women, as adjusted employment rates for men have been flat.
Comparisons to pre-recession employment rates are not, however, a reliable guide to whether the United States is at or above full employment. Instead, they reflect a combination of both the cyclical rebound of the economy and structural trends in labor markets.
Adjusted for Aging, the Employment Rate Is Above Where It Was Prior to the Great Recession
Older Americans are much less likely to work than younger Americans: The employment rate for workers ages 25 to 54 averaged 79 percent in 2018, while the average for workers ages 60 to 64 was 55 percent. As a result, the aging of the population will tend to drive the employment rate down, even if employment rates for particular age groups (such as older men or younger women) remain constant. This represents a purely “demographic” effect that largely reflects child-bearing decisions made decades ago and which, as a result, does not reflect current economic conditions.
To determine how much the employment rate has declined purely as a result of the aging of the US population, we can ask a straightforward question: What would the overall employment rate be today if the population maintained its actual age structure, but the likelihood of employment for individuals at a particular age was the same today as it was at the end of 2007? If this were the case, the employment rate in the fourth quarter of 2018 would be 60.1 percent, which is half a percentage point lower than the actual employment rate of 60.6 percent in the fourth quarter of 2018. In other words, adjusting for the aging of the population, the employment rate rose over the last 11 years as shown in figure 1 (for more detail on this calculation, see the technical note at the end of this blog post).
The Employment Rate Has Fallen for Younger Workers and Has Risen for Older Workers and Women
The increase in the age-adjusted employment rate from the fourth quarter of 2007 to the fourth quarter of 2018 shown in figure 1 represents the net effect of changes in participation rates since 2007 within particular age groups. Table 1 shows the effects by decomposing this age-adjusted increase into the portions attributable to six age-sex groups.
|Table 1 Contribution to nonaging component of decline in US employment-population ratio, 2007:Q4–2018:Q4 (percentage points)|
|Note: Totals may not sum due to rounding.
Sources: Bureau of Labor Statistics, Current Population Survey; Haver Analytics; and authors' calculations.
As table 1 shows, within-group declines in employment rates among younger workers (ages 16 to 24) have been pulling down age-adjusted employment rates. Younger individuals have increasingly stayed in school and are also less likely than in the past to work while in school. At the same time, employment rates for older Americans have increased, in part due to increases in life expectancy, occupational safety, and educational attainment. Prime-age (ages 25-54) individuals have seen no change in the employment rate on net due to small but offsetting changes for men and women.
Reflecting this divergence for prime-age individuals and a smaller decline for women among younger individuals, the entire increase in the age-adjusted employment rate is attributable to women. For men, increasing employment among those ages 55 and older was only enough to offset declines for men prime-age and younger.
The magnitudes of the changes have evolved somewhat over time, as shown in table 2. Relative to the 2001–07 business cycle, the current cycle has featured slower employment declines for younger workers, continued employment gains for older workers, but at a slower rate for women, a similar downward drift in prime-age male employment, and a considerable improvement in prime-age female employment.
|Table 2 Change in age-adjusted employment-population ratio by age
(percentage point change, annual rate)
|Sources: Bureau of Labor Statistics, Current Population Survey; Haver Analytics; and authors' calculations.|
Most of the differences across demographic groups for the past business cycle are related to the severity of the initial shock, not the recovery. Since the last quarter of 2009, when the age-adjusted employment rate reached its low for the recession, age-adjusted employment rates for each age-sex group have increased by 0.3 to 0.6 percentage point per year, with somewhat faster gains for those ages 16 to 24. But there was much more variation across groups in the sizes of the initial declines, ranging from 0.1 percentage point per year for women ages 55 and older to 4.8 percentage points per year for men ages 16 to 24.
In the current business cycle relative to earlier decades, male employment trends are roughly similar, while trends for women have worsened, consistent with an overall decline in women’s employment since around 2000.
Labor Force Participation Rates, Adjusted for Age, Have Nearly Recovered to Their Pre-recession Rates
The employment-population ratio reflects a combination of two factors: the labor force participation rate (i.e., the share of the population working or looking for work) and the unemployment rate (i.e., the share of the labor force that is not working). On an age-adjusted basis, the improvement in the overall employment rate between the fourth quarter of 2007 and the fourth quarter of 2018 reflects a 0.9 percentage point reduction in the unemployment rate outweighing the 0.1 percentage point decline in the labor force participation rate.
Specifically, the labor force participation rate fell 3.1 percentage points from the fourth quarter of 2007 through the fourth quarter of 2013 and has been roughly stable since then. The underlying aging of the population, however, should have pushed the labor force participation rate down steadily over this period. As a result, the labor force participation rate is now very close to where it was at the end of 2007 after adjusting for aging—as shown in figure 2. The underlying age-gender components have evolved similarly to the ones described above for the employment rate.
Is the United States At or Above Full Employment?
The trends described above reflect a combination of the cyclical behavior of employment in the wake of the 2007–09 recession and the many structural factors affecting employment rates for different age and gender groups. They do not, however, answer the question of whether the United States is currently at or above full employment for three reasons.
First, the fourth quarter of 2007 may not be a neutral benchmark because the economy may not have been at full employment then. Given that core inflation was slightly above target and rising slowly in 2006 and 2007 it is, in fact, plausible that the United States was above full employment then. On the other hand, prime-age employment rates in 2007 were well below their pre-recession 2000 levels suggesting the United States was below full employment.
Second, underlying structural trends change employment rates over time. For example, from 1950 through 2000 women entered the workforce, raising employment rates for reasons that would have no implications for the assessment of slack in the economy. Over the last decade, most other countries have seen relatively larger increases in employment rates—in many cases without even adjusting for age. Although much of this rise appears to have been related to policies to encourage older workers and women into the workforce, it is possible that the United States should have seen a larger increase too, suggesting that we have more slack than this comparison would suggest.
Finally, the rate of unemployment consistent with stable inflation may change over time in response to globalization, variations in productivity growth, wage setting institutions, expectations, and other factors. That is why looking at price and wage inflation is a more reliable gauge of slack than comparisons of employment rates over time—even if these comparisons are done carefully by adjusting for age.
To calculate the effects on employment rates and labor force participation rates of the aging of the US population, counterfactual quarterly histories of these rates are constructed using data from the Current Population Survey conducted by the US Bureau of Labor Statistics. Employment and participation rates for age-sex groups are held fixed at their 2007 annual average values, while each age-sex group’s population share evolves along its actual path since the fourth quarter of 2007.
Data for the following age-sex groups are used in constructing the counterfactual (since they are the most granular data published by the Bureau of Labor Statistics on a not seasonally-adjusted basis):
|75 and older||75 and older|
To correct for slight differences resulting from the use of non-seasonally adjusted data, the within-group employment and participation rates are scaled such that the counterfactual rates are equal to the actual, seasonally-adjusted participation rate in the fourth quarter of 2007 for each age-sex group for which seasonally-adjusted data are available.
The age-adjusted change in the employment and participation rates represents both the effect of changes in these rates since 2007 within particular age groups and the interaction of these within-group changes with changing demographics. The non-aging contribution for each of the six groups included in table 1 is calculated by determining the change in the group-specific employment rate that is not due to aging and multiplying it by the group’s share of the working age population in the fourth quarter of 2018. The change in the age-adjusted employment rate for each group is the difference between the total change and the change due to aging for that group (which is calculated following the same approach used to determine the change in the overall employment rate due to aging).
1. Figures may not sum to totals due to rounding. The remainder of this blog post refers to the employment-population ratio as the employment rate.
2. The age-adjusted unemployment rate here is calculated using relative population shares of each demographic group, not the relative labor force shares.