What are the forces moving the Minnesota economy? Adam Belz tries to identify the trends and show the connections between Minnesota and the larger U.S. and global economies. You can connect with him on Twitter: @adambelz

Minnesota's labor force participation rate is falling, but let's not read too much into it

Posted by: Adam Belz under Business trends, Economics Updated: April 4, 2013 - 10:28 AM

Many times when we publish a story about Minnesota job growth or the unemployment rate, readers rightly point out that the data doesn't tell the whole story.

One point they make is that so many people have given up on finding a job that it forces down the labor force participation rate, which skews the unemployment rate -- 5.5 percent in February -- downward. There are thousands of people who don't have jobs who are not counted when the unemployment rate is calculated, the argument goes.

It's true that the labor force participation rate has been dropping in our state. It's not clear at all, however, that this is evidence that large numbers of people who would rather work have given up and dropped out of the labor force.

First, let's define the labor force participation rate. It is the percentage of people 16 and older who are not in the military, prison or a mental health institution (the adult civilian non-institutionalized population) who are either working or trying to work (the labor force). The rate can be calculated by dividing labor force by civilian non-institutionalized population, which, to be clear, includes everyone who is retired, even those who are 100 years old.

So: LFP = Labor force/Civilian non-institutionalized population

As you can see in the chart below, Minnesota's labor force participation rate has fallen for the past decade. Though it moved slightly upward in January, it dipped again in February and remains 4 percentage points lower than it was exactly 10 years ago, in February 2003. 

 

 

The state labor force -- again, those either working or actively looking for work -- is as large as it has ever been, in raw numbers. It's just under 3 million strong. But the "civilian non-institutionalized population" -- again, that's everyone 16 and older who isn't in prison, a mental health institution or the military -- has also been growing. It now numbers 4.2 million people. That's why the labor force participation rate has fallen: The civilian population is growing faster relative to the labor force.

 

 

So what we have in Minnesota is 365,000 more people who could conceivably be in the workforce than we did in 2003. But only 105,000 more people actually in the workforce.

This is mostly not a symptom of the recent recession and the economy's slow recovery, but rather a symptom of demographics: Minnesota is getting older.

The labor force participation rate has been declining for a long time, as the first chart shows, and that is mostly because baby boomers are retiring. Though I don't have specific data on the numbers of people who retired in the past 10 years, it seems plausible that there could be 260,000 people in Minnesota who retired of their own volition over a decade.

The Minnesota state demographer has projected that about 55,000 people in the state will turn 65 in 2013, and the number will increase each year until more than 60,000 turn 65 in 2016. If all those folks retired, it would be more than enough to keep driving down the labor force participation rate.

And people are living longer. If I retire at 65 in 2013 and live for another 30 years in Minnesota, I will count against the state's labor force participation rate until 2043, because I will be counted in the civilian non-institutionalized population but not the labor force.

Expect more of that scenario over coming decades, and expect the labor force participation rate to keep falling. But don't necessarily assume that a declining labor force participation rate means there is a huge shadow population of unemployed people not being counted in the unemployment rate.

There will always be some of that, but the biggest reason the labor force is shrinking relative to Minnesota's population is simple: More people have been retiring, and they are living longer.  

 

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