- We expect the labor force participation rate to rise from a little over 64% in early 2011 to 66% by the end of the decade.[1] Given projections of the adult population, MA’s forecasts could imply roughly 5 million more potential workers in 2020 than anticipated in recent projections from the Congressional Budget Office (CBO).
- Faster labor force growth implies faster growth of potential GDP.
- Faster growth of potential GDP and greater employment imply higher federal revenues and lower deficit-to-GDP ratios than a more pessimistic path.
The CBO expects the participation rate to trend down, or at most remain broadly flat, over the next several years.[2]
- The CBO’s baseline forecast shows the participation rate declining to almost 63% by 2020, nearly 3 percentage points lower than our forecast.
- The CBO report mentions population aging and an increase in disability claims as reasons to expect a period of decline in the participation rate and subdued increases in the labor force.
Macroeconomic Advisers’ econometric model of the labor force also takes into account underlying trends in the aging of the population, but produces higher projections for the participation rate due to some several features:
- Declining unemployment will contribute to a “cyclical” rebound in the labor force.
- We find that increases in life expectancy have a positive effect on labor force participation as workers rationally delay retirement.
- The model also incorporates the influence of wealth on labor supply.
- The model is explained in this report, as are the specific factors that contribute to our forecast for a sustained increase in the participation rate.
Importantly, analysts at the Congressional Budget Office point to the possibility that immigration could rebound in coming years, resulting in significantly more population growth than current official population projections.
- CBO expects a rebound in immigration as the US economy strengthens, resulting in substantially faster growth in the adult population than Census Bureau projections.
- Higher immigration might have little impact on the aggregate participation rate, but it is an additional source of upside risk to our forecast for growth in the labor force.
Whether due to a rising trend in the participation rate or faster population growth, the consequences of faster labor force growth to the outlooks for trend GDP growth and government revenues are significant.
[1] See Macroeconomic Advisers’ “Long-Term Economic Outlook,” March 25, 2011.
[2] See “CBO’s Labor Force Projections Through 2021,” published by the Congressional Budget Office in March, 2011.
This is from a commentary that was published on April 26, 2011.
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