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Study: Retirees can explain the drop in the labor force since 2012

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The U.S. labor force has been shrinking rapidly in recent years. Back in 2007, some 66 percent of working-age Americans had a job or were actively seeking one. That shrunk to 64 percent by the end of 2011. Today, it's down to 63 percent.

Economists often point to three explanations for the drop: More and more Americans are retiring as the Baby Boom generation ages; more workers are going on disability; and the shoddy economy is discouraging people from seeking work.

But perhaps we can get even more precise: A fairly new paper (pdf) from Shigeru Fujita of the Federal Reserve Bank of Philadelphia argues that a growing number of discouraged workers were indeed a big factor in shrinking the labor force between 2007 and 2011. But that's less true today. An uptick in retirements are what's driving the continuing fall in labor-force participation since the start of 2012.

How does he figure? Fujita sifted through all the Census micro-data on the reasons people gave for not participating in the labor force. A few conclusions stood out:

1) First, the participation rate dropped 3.9 percentage points between 2000 and 2013. About 65 percent of that decrease was due to people either retiring or going on disability. The rest of the drop was due to "other" reasons — whether it was people going back to school, raising kids, or getting discouraged by a weak job market...

2) During the first four years of the recession, the horrible U.S. economy was indeed a major reason why people were dropping out of the labor force.

Between the end of 2007 and the end of 2011, the number of people who wanted a job but weren't actively looking for one — perhaps because they were discouraged by the weak labor market — increased significantly. This explains one-quarter of the decline in the participation rate over this period, Fujita estimates.

3) Something shifted last year, however. Between the start of 2012 and the summer of 2013, Fujita found, virtually all of the drop in labor force participation has been due to an increase in retirements.

Meanwhile, the total number of workers who have been discouraged and abandoned their search for jobs appears to have stabilized. (Note: This does not mean workers have stopped dropping out — it simply suggests that the overall number isn't increasing the way it was at the start of the recession.)

Notice that retirements don't seem to have played a big role in the decline of the labor force until around 2010 — and then they started accelerating. One possible theory here is that many workers who were near retirement in 2008 spent a few extra years on the job after the financial crisis to rebuild their 401(k)s and retirement savings.

For Fujita, one takeaway here is that we may not see the U.S. labor force participation rate rebound any time soon, even as the economy improves — because retirements now appear to be the driving force here. "[I]t is not clear whether the overall participation rate will increase any time soon, given that the underlying downward trend due to retirement is likely to continue."

(The pointer to the paper is thanks to Robin Harding, who draws out another possible implication: If quantitative easing from the Federal Reserve pushes up the stock market, that could help retirees rebuild their portfolios and retire sooner, thereby pushing down the participation rate.)

Related: Here's our previous coverage of the shrinking U.S. labor force.