Boomers Retiring May Lead to Tight Labor Market
According to the Pew Research Center, the number of baby boomers retiring in 2020 had its sharpest increase in a decade, fueled by the pandemic, and having a not so obvious impact on the labor market. Many retirees that lost their jobs may have decided not to return to work or even those that did not lose their jobs may have shifted their priorities in light of the number of lives cut short by Covid.
As boomers retire, an often used metric for slack in the labor market may no longer offer a uniform comparison on a year to year basis. The labor force participation rate, for example, is calculated by taking the number of people employed or looking for work divided by the civilian working age population, which is 16+. There is no upper age range. People currently employed and looking for work are both counted in the labor force. Only when someone stops looking – for any reason, including retirement – do they drop out of the labor force calculation.
However, even though retirees are not counted in the labor force they are still counted in the civilian working age population. So the numerator of the labor force participation rate will decrease as more boomers retire, causing the labor force participation rate to decrease – all else equal. There are other factors affecting the labor force as workers who may have stopped looking during the pandemic start seeking employment again. That will help the labor force participation rate recover some, but with a higher number of retirees dropping out of the calculation, full employment might be reached at a much lower labor force participation rate than it has in the past.
At a current rate of 61.5%, the labor force participation rate is almost 2% lower than the pre-pandemic peak of 63.4. With roughly 200 million people in the working age population, it would take about 4 million jobs to get back to those levels. It would take 10 million jobs to get back to the 66% labor force participation levels before the 2008 recession.
With more boomers retiring, we don’t see the labor force participation rate getting back to those levels, which means the labor market is already tighter than it seems. Further improvement from here will be challenging.