Chart of the Day: Don't Blame the Shrinking Workforce on Retirees

Since the recession began, labor market participation has been falling. In July, just 63.9% of Americans were counted as a part of the workforce, a new 25-year low. Although the number of unemployed Americans remains quite high, the group sitting out of the labor market continues to grow as well.

Some argue that this causes statisticians to underestimate the suffering that the bad job market has caused: if those who have given up looking were considered unemployed, then millions more Americans would be reflected in the national unemployment rate. Others, however, assert that as the population is aging, many Americans are retiring -- possibly early if they've been laid off -- so we shouldn't be too alarmed by the shrinking workforce. Who's right?

This debate can be easily judged by referring to a simple chart. Let's consider how the percentage of employed Americans has changed within various age groups:

I didn't use more up-to-date data than December 2010 because that's as far back as monthly population estimates go on the Census Bureau website. But the labor market hasn't changed dramatically since then, so the chart above provides a pretty clear picture for how the jobs picture has evolved by age group since late December 2007. Over this period, the unemployment rate had risen from 5.0% to 9.4%.

This chart quickly puts to rest any assertion that elderly Americans retiring are causing labor market participation to decline. In fact, of all the age groups, the percentage employed of those 55 years-of-age and older has declined the least. It has barely moved, falling from 57.0% in late 2007 to 56.2% in late 2010.

Instead, of older workers retiring, we might be seeing the opposite. Although some workers in this age group are being laid off, participation levels are likely remaining high because those still employed feel that they must work even longer, since their nest eggs may have shrunk due to the bad economy. Anyone who had a significant amount of their retirement savings in stocks or real estate in 2008 probably lost a fair amount of money when the financial crisis hit, which may have delayed some plans for retirement.

Meanwhile, all of the other age groups have seen far bigger drops in their employment rate. Those ages 45 through 54 had the second smallest drop with 73.8% employed at the end of 2010, compared with 79.1% in 2007 -- a difference of 5.3%. The group having suffered the most, however, is the youngest age group. Its employment rate has declined by 8.9% to just below 25%. This likely indicates that fewer high school students are finding jobs and that high school graduates without a college degree are finding the job market enough tougher.

From this data, we can be fairly certain that the big decline in labor market participation is due in large part to more discouraged Americans who have temporarily given up looking for work and exited the workforce than due to older workers seeking early retirement. Indeed, the percentage of employed workers aged 55 and over has barely changed. Instead, the employment rates have dropped significantly for all other age groups.