by Calculated Risk on 2/07/2012 01:24:00 PM

In a research note released last night, Goldman Sachs economist Sven Jari Stehn looked at the population revisions from the 2010 Census and argued that there is "No Labor Force Participation Rebound in Sight".

This is a key point. Some of the recent decline in the participation rate was expected due to demographics (mostly aging of the population), but most analysts expected some rebound in the participation rate this year as the economy (hopefully) improves. Goldman is now expecting the participation rate to stay flat through 2013.

From Stehn:

The demographic structure of the population matters because participation follows a distinct life cycle: it rises with age as teens enter the labor force, reaches a plateau between ages 25 and 55, and falls sharply thereafter due to retirement. Moreover, participation is higher for prime-age men than women, mostly due to child bearing. This life-cycle pattern can be seen by splitting the working-age population into four groups: young individuals (aged 16-24 years), prime-age men (25-54), prime-age women (25-54), and older individuals (55+). Specifically, in 2011 prime-aged individuals had much higher participation rates (89% for men, 75% for women) than young (at 55%) or older individuals (at 40%). The updated population controls from the 2010 Census revealed an increase in young and older workers relative to prime-age ones, pushing down the estimate for the aggregate participation rate.
...
[O]ur model suggests that the participation rate will remain broadly flat at 63.7% through the end of 2013

This is very important. Although I expect the participation rate to decline over the next couple of decades as the population ages, I thought the participation rate would rise a little in 2012. If the participation rate stays steady at 63.7%, then the unemployment rate would fall quicker than I had expected (and possibly quicker than the Fed expected too). I'll add some calculations later.

This is a reminder that we can't just look at the participation rate and the overall employment-population ratio (the ratio of employed to over 16 population).

Click on graph for larger image.

During this period of a significant shift in demographics, it helps to look at the employment-population ratio for the prime working age group (25 to 54 years old). This leaves out most changes in demographics, although there are more women than originally thought, so that impacts this ratio too.

For this key demographic, it appears the employment situation for men is improving a little, but the employment situation for women is still lagging behind.