Follow-up to the Unemployment Rate Puzzle

AB pointed to a line of thinking that suggests that increasing numbers of people on disability may be contributing to the fall in the labor force participation rate (LFPR) that I pointed out the other day in a post on The Unemployment Rate Puzzle. Among the excellent comments on that post were some other suggestions, however. A longer-horizon graph provides us more information about their relative importance.

The most notable feature of this graph is the strong downward trend, which is the result of a) a slight trend toward men staying at home with kids, and b) a substantial trend of men retiring earlier than they used to. From this chart, it looks like the recent drop in LFP is exactly consistent with the long-term trend.

One other interesting and unexpected thing to note is what the graph does not show – a cyclical fall in the LFPR that corresponds with recessions. Instead, the LFPR typically falls in the middle of the expansion portion of the business cycle, not during recessions (which are shaded on the graph).

Put this graph together with two other tidbits: a) as dc pointed out in the comments to the Unemployment Rate Puzzle, the age group in which men are most significantly leaving the work force more than women is in the 45-54 year old category; and b) college-educated people are leaving the work force more (or earlier) than poorly-educated people. Combining these bits of data with the fact that the graph shows that men’s LFPR is simply returning to its trend rate, I come to the conclusion that early retirement is a major contributor to the recent fall in the LFPR. Men who are well-educated are leaving the work force at a younger age than they used to. Put another way, it looks like some men who had put off retiring during 1999-2002 have decided to finally do it, and have left the labor force. Together with the disability story, I think this accounts for a large portion of the unemployment puzzle.


UPDATE: Anne (regular contributor to the comments) reminded me of this relevant NYTimes story from the other day, about the trend toward early retirement. It’s worth a read if you haven’t read it yet.