Former Obama economic adviser Austan Goolsbee was back on TV saying that more than 60% of the decline in the labor force participation rate (LFPR) is simple demographics … old people retiring.

Last week, I posted a back of the envelop analysis that said seniors retiring is less than 1/3 of the blame.

**Today, let’s do the analysis more rigorously, using a technique that I teach called PVA – Profit Variance Analysis ….**

PVA is a methodology for estimating the contribution of different factors to explaining the difference between 2 results – say, a company’s forecast of profits and the actual result.

We’ll be analytically explaining the difference in the LFPR from 2007 to the most recent reporting in 2013.

In the most recent reporting period, the overall LFPR was 63.3% … that’s down 2.7 percentage points from the 66% LFPR in 2007.

Note that in 2007, the over 65 crowd was 15.6% of the population … and had a group LFPR of 16%

In 2013, the over 65 group had grown to 17.5% of the population … and the group’s LFPR increased to 18.8%

During that same period, the under 65 group decreased as a percentage of the population (one goes up, the other goes down) … but, the groups LFPR declined – by 2.5 percentage points, from 75.2% to 72.7%.

The essence of the PVA methodology is change one factor at a time and determine how much that factor’s change impacted the the answer – the overall LFPR.

We’ll start with the 2007 factors … and then change the under 65 group’s LFPR … leaving all other factors the same.

If the only change between 2007 and 2013 had been the under 65 group’s LFPR, then the overall LFPR would have been 63.9%.

So, we can say that the drop in the under 65 group’s LFPR drove 2.1 percentage points of the total LFPR decline that we’re trying to explain … about 80% of the total drop.

OK, let’s finish the analysis ….

Above, we noted that from 2007 to 2013, the over 65 group’s LFPR increased to 18.8%.

So, we’ll change that factor (column c) and hold everything else constant.

The increase in the over 65 group’s LFPR boosted the overall LFPR by .4% … from an estimated 63.9% (column b) to 64.3% (column c).

But, Prof. Goolsbee right that the population mix towards the over 65 group.

We can capture that effect by changing the mix percentages for both groups (column d).

The change in the population mix dropped the overall LFPR by 1% … from an estimated 64.3% (column c) to 63.3% (column d).

So, we’ve explained the relative contributions of each of the factors the the 2.7 percentage point drop in the overall LFPR.

The over 65 crowd drove the overall LFPR down by .6 percentage points … a 1% drop due to the mix shift, offset by a .4% increase in the over 65 LFPR.

The 65 and under crowd drove about 2.1 percentage points of the overall 2.7% decline in the LFPR.

So, Mr. Goolsbee, the old folks are only responsible for about 20% of the LFPR decline.

For the rest, look to the economic policies that you helped craft.

As you like to say, “It’s that simple.”

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June 6, 2013 at 10:59 am |

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