The objective of ECONOMIC INSIGHTS is to bridge the gap between the latest economic data and what it means for Delaware businesses.
Guest Columnist
What’s happening?
For centuries the common pathways to obtaining wealth were inheritance, marriage or conquest. While these pathways are still traveled, the most common road to wealth accumulation today for the average American household begins with participation in the labor force.
The labor force participation rate is defined as the percent of persons ages 16 to 64 who are either working or looking for work. Research on the accumulation of wealth in the United States, including home ownership, shows that the critical factor over time is paid employment or self-employment (especially business start-ups). The recession of 2008 had a profound impact on labor force participation and subsequently wealth accumulation.
According to U.S. Bureau of Labor Statistics, the Delaware civilian labor force has dropped almost 5 percent over the last 10 years. The proportion of Delaware residents age 18 to 64 who are either employed or looking for work fell from 66.3 percent in 2004 to 61.4 percent in 2014 (the latest Delaware data).
The drop in labor force participation was greater for Delaware men (6.2 percent) than women (3.6 percent), and greater among whites (5.1 percent) than Hispanics (4.4 percent) and blacks (3.6 percent). The drop was most substantial among Delawareans ages 16 to 19 (down 14.7 percent) and 20 to 24 (down 8.0 percent).
The only counter trend was an increase in labor force participation by Delaware residents ages 55 to 64 (up 1.8 percent) and 65 and over (up 4.5 percent).
Why is it happening?
By all measures the 2008 recession was devastating. The unemployment rate doubled, stock prices plunged 57 percent, the inflation adjusted earnings of the median worker reverted back to its 1968 level, and there was a 22 percent drop in household net worth. The drop in net worth was most severe for households in the middle of the income distribution, especially as a result of the precipitous decline in the value of owner-occupied housing.
At the same time, the wealth held by the top 20 percent increased – as did the inequality of both the household wealth and income distributions.
The most obvious and understandable reaction was the decision by those 55 and older to remain longer in or return to the labor market. The accumulation of household wealth peaks when workers are in their mid-50s. And the sudden drop in the value of their retirement portfolios spurred older Delaware residents to return to the labor force, even if part time.
Construction was the hardest hit industry and was dominated by men and Hispanics. Blacks were more concentrated in less cyclically sensitive service industries.
Then there have been two longer-term trends. First, younger married women have been steadily leaving the labor force to have and care for children. Second, there has been a steady rise in the proportion of high school graduates engaging in postsecondary education rather than immediately seeking a job. The reduction in job market prospects for entry-level workers helped to spur young people even more to continue with postsecondary education.
The implications for business
Slower growth in Delaware’s labor force, especially given no upward trend in productivity, means slower economic growth. This, in turn, means slower growth in consumer spending and slower annual increases in Delaware state government revenue.
Over time, slower growth in the resident labor force will eventually lead to an increase in wages, especially for younger workers. This will propel personal income forward and hopefully build the confidence and credit conditions that will spur home ownership.
Also on the positive side, the supply of older, more experience workers willing to fill in part-time gaps should enhance productivity.
The decline in the labor force participation rate means less cause for celebrating the recent drop in Delaware’s unemployment rate since the ranks of the unemployed have been reduced by those simply leaving the workforce.
The macro impact of the recession was a clear disruption in the belief in the ever-improving economic well-being of Americans. This will express itself more uncertain household credit and in a reduced willingness by households to take financial risks.
John E. Stapleford is the director of the Center for Economic Policy and Analysis for the Caesar Rodney Institute and works as an associate director and senior economist with Moody’s Economy.com
