Fraser Forum

Participation rates—good news, bad news or neutral news?

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Part of being a market-oriented economist—and is there really any other kind?—is learning not to have the same reaction to economic news that everybody else does.

For instance, this week StatCan published a short study on “The impact of aging on labour market participation rates.” (In the usual StatCan way, you have to click about six times—six clicks of separation, that would be—from the page announcing the study before you actually reach the it. Don’t click on the first button you see saying “pdf.” That’s just the product announcement in pdf, in case you like to store product announcements.)  

What StatCan found is that participation rates are down overall—that is, for people 15 and over. Reading that, a lot of us have the involuntary reaction of: “Uh-oh, that’s no good!” On the other hand, people 55 and over have increased their participation rates, from 24 per cent in 1996 to 38 per cent in 2016. “Yay, that’s great!” many of us naturally think. (By the way, isn’t 15 a little young for tracking labour force participation these days? Does anyone do real work—rock stars apart—at 15? If 15-year-olds are unemployed, is that really a big social problem? Shouldn’t they be in school?)

You might assume average participation rates going down while older folks’ participation rates are going up means people 15 to 54 had a decline in “part rates,” as labour economists call them, that offset the rise among older folk. If you did, you’d be wrong. Their rates did go down a little but mainly what’s happening is that we older folk are a bigger part of the population than we used to be and we have generally lower part rates—even though our part rates are in fact rising—so our greater weight makes the overall average go down. (The Soviet Union displayed falling life expectancy in its final few years, not just because it was failing as an economic system, though it was, but also because its regions with lower life expectancy were growing more quickly than those with higher life expectancy.)

Should we be happy or sad about any particular changes in part rates? Not necessarily. What the aggregate data summarize are people making their own choices, presumably in their own best interests, about whether or not to participate in the labour market. These choices can turn out to have been wrong, of course. Some people will retire and then regret it. (Others will not retire and regret that!) But in general we presume that if people decide to leave or enter the labour force, they’re doing it for perfectly good, well-thought-out reasons. So any change we observe reflects people making the best choices they can, given their circumstances.

Why are some people over 55 deciding to stay on longer in the work force? The StatCan study does a little speculation about that.

• In part, they aren’t really. Rather, that group is itself getting younger as more and more baby-boomers move into it. Younger oldsters have higher part rates so the average oldster part rate is rising.

• More people 55 and older have university degrees than used to and having a degree is usually associated with working longer, possibly because the work involved is less likely to be physical. That may give the lie, by the way, to the current federal government’s reasoning in deciding to back off on the previous federal government’s decision to gradually move the normal retirement age to 67, which was that at 65 people who have done physical labour all their lives are exhausted. That’s probably true but such people aren’t as important a part of the labour force as they used to be.

• Wages are higher for such people than they used to be so staying on at work is more profitable.

• Older workers may be more healthy now than they were decades ago and that might enable more to stay at work.

• Older people have somewhat more debt than they used to and that may be inducing some of them to stay on in the labour force. Of course, that they are staying on may enable them to have more debt, so it’s hard to know which way the causality runs exactly.

In sum, and as usual, lots of things can be going on. The presumption of the market-oriented economist is that people are making the decisions that are best for themselves. So in that sense the appropriate reaction to any movement of the part rate, up or down, is “Good for them!”

Now, of course, it may be that some government policy or other is helping make the decision for them. For instance, an emerging literature in the United States suggests excessive generosity of the Social Security Disability Plan is inducing many people to take early retirement who could work longer and probably would work longer if the government weren’t making them an offer they can’t refuse.

But if the government is more or less neutral in influencing their retirement decision, as it should be, then any decision people make is the right one and we economists needn’t get emotionally invested in whatever their choice may be.


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