Chicago Fed Letter. “Explaining the Decline in the U.S. Labor Force Participation Rate,” by Daniel Aaronson, Jonathan Davis and Luojia Hu. March 2012, Number 296.
The letter goes on explain that “about half” of the labor participation rate decline is explainable by boomers retiring and that “this will continue for some time.”
Now look at the graph:
The problem with the thesis in the letter, of course, is that most of the decline happened all at once, but the boomers don’t retire all at once. They do so over time. In fact the big “step function” took place over the space of less than two years, which is rather dramatic — and doesn’t mesh with a “demographics” explanation.
But if you accept that paper’s conclusion then you’re in even bigger trouble because the participation rate is what determines the government’s ability to extract taxes from the population and thus fund social programs. Need I remind everyone that between Medicare, Medicaid, and Social Security approximately half of all Federal spending is consumed, if you add in Defense it’s 75%, and if you add welfare on as well it rises to 87%!
With interest expense at 6% of the budget at present you are at 93% of spending and if blended rates rise by just 2% the entire rest of the budget — every other program from education to health and human services to the EPA on down the line — is instantly wiped out. If rates rise more then the government is immediately insolvent as well at today’s unsustainable level of borrowing!
In short if you accept that the participation rate change is a secular change that is driven by demographics and it is going to continue for a good while then you must be banging the drum hard and long for immediate and permanent actual reductions in Pension, Health Care, Defense and Welfare spending right here and right now because if we don’t the Federal Government is going to blow up as a matter of absolute mathematical certainty.