Participation is Half the Battle by Stephen Duneier First published November 22, 2014
Right up until 1940, the labor force in the United States had been defined as those who were 10 years old and over. Yes, little kids were active participants in our economy, working rather than attending school. In 1836, Massachusetts passed a law requiring factory workers under the age of 15 to attend school at least 3 months a year, but they were progressives. It wasn’t until 1938 that federal law regulated minimum ages and hours for children.
To this day, we define the labor force according to the Fair Labor Standards Act of 1938. Everyone who is 16 years old and up is technically part of our labor statistics, including unemployment and the participation rate. Seem silly to include kids who are just 16 years old? Good, then you’ll be interested in the rest of this Macro Radar.
Back in the early 1800‘s, America was primarily an agrarian economy, employing as much as 80% of the labor force. Since most farms were family owned, it was only natural that parents would put their kids to work. Among white children between 5 & 19 years old, only about half were enrolled in school, and even those that were would attend sporadically for just a few hours at a time.
Then manufacturing took over and kids moved to the factories. When a child works in an industrial setting though, it has a very different connotation than a child essentially doing chores on their family property. With the women’s suffrage movement gaining steam, it’s not surprising that there was a simultaneous push for child welfare laws. Even though the federal law wasn’t enacted until 1938, the wheels were set in motion to move kids out of the labor force more than 50 years earlier.
As recently as 1910, a full quarter of the US population over the age of 25 had less than a 5th grade education and only 13% had completed high school. However, as children left the labor force, they began attending school. Kids not only finished elementary school, they kept on going. As of 1970, half of America’s adults had a high school diploma and from there, the numbers jumped, reaching 88.8% by 2010. That’s why you think it’s silly that high school aged students are still counted in our labor force statistics. You assume that since just about everyone gets their high school diploma these days, most of them aren’t really active labor participants, and you’re correct. The participation rate among 16 & 17 year olds is lower than every other subset, but between 1948 and 2000, it had held fairly steady at approximately 40%.
It’s only since then that it has collapsed to 20%. The decline is rivaled only by the 18-19 and 20-24 year old subsets. You could attribute the collapsing participation rates among this age group to the desire to attend college, but as we saw in previous episodes, it’s the lack of work that drives the demand for education, not the other way around. So what happened? As is often the case, when inflation spiked in the early 70’s, Americans began saving less and taking on more debt, thereby borrowing from their own futures. By the late 70’s, more 45-49 year olds began to participate in the labor force. 5 years later, the 50-54 year olds did and so on. Each time the older generations who were already entrenched in their jobs, increased their participation in the labor force, they were eradicating an opening meant for the youngest generation.
So, it’s not that life expectancy suddenly jumped, it’s that people hadn’t prepared for retirement neither/nor were they willing to adjust their spending habits as they got older. As kids entered the workforce, they had trouble finding work, particularly the kind of work that would support the lifestyle to which they had become accustomed. Rather than struggle, they opted to not only finish high school, but go on to college, after all, the statistics were clear as day. College graduates are less likely to be unemployed and have significantly higher incomes. There’s just one problem with those statistics, they reflect the past, not the future. Since 1992, the number of Americans 25 years old and up with at least a bachelor’s degree has skyrocketed 82.5%, whereas those without it has grown by a mere 8.9% and the effects are already being felt. According to the Federal Reserve, 44% of recent graduates with bachelor’s degrees and higher were in a job that required little more than a high school diploma and 1/5 were in “low-wage” jobs, earning less than $25,000 per year. With few opportunities for decent jobs and attractive wages, young adults are opting to stay in school longer, borrowing money to finance bachelor degrees that now take nearly 6 years to attain. Even at the 6 year mark, only 59% of those who start college, actually graduate.
The spike in demand for a college education has driven prices up at several multiples of the underlying inflation rate. Since 1992, adjusting for inflation, the cost of attending a “4-year” institution has jumped 70%. Higher education has become a growth industry, with the number of available seats doubling since the 80’s. New colleges are popping up around the country, and online. Whole new industries have developed, catering to parents desperate to help their children get into a “good” school.
Implications There are so many implications to consider, many of which will be covered in future editions of Macro Radar, but here are a few to get the ball rolling. First of all, we are missing a signal in the participation rate. Economists, including those at the Fed, keep saying that it began to fall well before the financial crisis, and therefore it is a structural issue. I believe they’re wrong.
What is structural is that everyone seems to believe that you must attend college in order to get a decent job and make real money. It will take time to change that. Therefore, as silly as it is to include 10 year olds or even 16 year olds in our analysis of the labor force, I am arguing that we should also exclude the entire population under 25. When you do that, you see that the participation rate in 2008 was exactly the same as it was in 1996. However, since then, it has collapsed. That means it isn’t as structural as many seem to believe. Something actually did change as a result of the financial crisis.
Secondly, unless the economy explodes, the added value of a college degree will collapse, just as the value of a high school diploma did when everyone had one of them. However, there’s one big difference. A high school diploma was/is fully funded by the government. The cost of a college education is not and a whole generation is getting deeper and deeper in debt as a result. Yet another drag on future economic growth. (Note: Add student loan forgiveness to your macro radar. It would be a powerful tool for reducing wealth disparity, stimulating velocity and adding wage pressure in an otherwise inherently low inflation environment.) Third, I believe the shift in participation from the young to the old masked a leap higher in productivity rates. As the deeply entrenched older generations reduce their spending to a more reasonable level, the result of everyone’s expectations being adjusted by the financial crisis, they have begun to exit the workforce. That’s the change we’ve seen in the participation rate since ’08. However, rather than fill their places with the younger generations, they’ll simply allow the job to disappear, or be filled by technology. That means, lower participation, low unemployment, low wage pressure and higher productivity prints.
About the Author For nearly thirty years, Stephen Duneier has applied cognitive science to investment and business management. The result has been the turnaround of numerous institutional trading businesses, career best returns for experienced portfolio managers who have adopted his methods, the development of a $1.25 billion dollar hedge fund and 20.3% average annualized returns as a global macro portfolio manager.
Mr. Duneier teaches graduate courses on Decision Analysis in the College of Engineering, as well as Behavioral Investing, at the University of California.
Through Bija Advisors' coaching, workshops and publications, he helps the world's most successful and experienced investment managers improve performance by applying proven, proprietary decision-making methods to their own processes.
Stephen Duneier was formerly Global Head of Currency Option Trading at Bank of America, Managing Director in charge of Emerging Markets at AIG International and founding partner of award winning hedge funds, Grant Capital Partners and Bija Capital Management. As a speaker, Stephen has delivered informative and inspirational talks to audiences around the world for more than 20 years on topics including global macro economic themes, how cognitive science can improve performance and the keys to living a more deliberate life. Each is delivered via highly entertaining stories that inevitably lead to further conversation, and ultimately, better results.
His artwork has been featured in international publications and on television programs around the world, is represented by the renowned gallery, Sullivan Goss and earned him more than 50,000 followers across social media. As Commissioner of the League of Professional Educators, Duneier is using cognitive science to alter the landscape of American K-12 education. He received his master's degree in finance and economics from New York University's Stern School of Business.
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