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2012 Leroy O. Stone. All rights reserved.

A New Labor Force Discouragement Index Based on Monthly Gross Flow Data Points to Continued Weakening of Older-Worker Confidence Through Summer 2012

by Leroy O. Stone

Above you see a pattern made by the levels of a recently developed Labor Force Discouragement Index (LFDI) among those aged 55 to 64 only. While based on the BLS’ identification of “discouraged workers” in the Current Population Survey sample, it is unique in making use of the monthly flow from the labour force into the state of being discouraged. (OECD has a file showing historical series for “incidence of discouraged workers” annually for several countries; but this is a point-of-time measure rather than a flow. See http://stats.oecd.org/Index.aspx?QueryId=9596 ). I will come back to what this pattern is “saying” below.

Few persons in the crowd of commentators about the fall in the national labour force participation rate during recent months took note of the continued rise of this rate among those aged 65 or more. The rate has been rising steadily in this segment through most of the past decade, and in the summer quarter of 2012 it stood at 19%. What factors help to explain this trend has not been a focus of published studies, to my knowledge, and so at this point we can only offer what seem like plausible hypotheses. One possibly useful hypothesis is that the uptrend arises from more aggressive risk management as a consequence of the aftermath of the “great risk shift”, which has reduced the population’s access to collective risk pooling arrangements with immediately-felt effects on those near the main ages for retirement.

Perhaps the first major aspect of the great risk shift (see J.S. Hacker, “The Great Risk Shift”, Oxford 2006) was the fast exit of companies from Defined Benefit pension plans. I hypothesize that the great risk shift has helped decrease older-worker’s confidence about maintaining their desired standard of living in retirement. I offer two sets of supporting observations, noting that they are far from proving the hypothesis to be correct.

The Employee Benefit Research Institute (EBRI) has since 1993 done a retirement confidence survey, and uses the results to update its index of older workers' confidence concerning their ability to maintain their desired standard of living in retirement. Here’s a chart built from their data (Figure 1 from Ruth Helman, Craig Copeland, and Jack VanDerhei, “2012 Retirement Confidence Survey ... ” EBRI Issue Brief, no. 369, March 2012).


This graph shows that lack of confidence was at a peak in 2011, and only a slight move down from this peak occurred in 2012. In 2011, over 50% of respondents had a lack of confidence, and more than a quarter said they had no confidence whatever, about their ability to maintain their desired standard of living in retirement.

The EBRI data are annual snapshots. To get an index that may point to confidence-level changes and uses more fine-grained time periods, I developed a "Labor Force Discouragement Index" (LFDI) whose chart you see at the top of this article. LFDI measures the relative size of the monthly flow of workers into the "state of discouragement" (as identified by the Bureau of Labour Statistics) from either unemployment or employment. The denominator comprises the sum of the unemployed at the start of the month plus those who moved out of employment into “discouragement” during the month. (The sources are the public use microdata files of the Current Population Survey, a joint product of the US Bureau of Labor Statistics and the Census Bureau, and my work here is supported by helpful colleagues at these organizations.) Notice the marked jump in the discouragement index (LFDI) between 2008 and 2010. The 2012 level was just slightly above that of 2010. (Recall that these data are for the June-to-August quarter only.)

In short, some three years after the Great Recession was declared finished, the confidence level among older workers continued to weaken through 2011 to 2012. (Chapter 4 of "Key Demographics in Retirement Risk Management" analyses the relative statistical importance of different factors that help to explain the drop in confidence.)

Among those aged 65 or more, a substantial segment is probably facing immediate shortages of income. Some who thought they had retired probably headed back into the labour market in search of earnings. The immediacy of this pressure would mean they are faced with the urgent challenges of risk management. Moreover, such challenges have important non-financial aspects. Thus they need a holistic approach to risk management ( what I’ve called “comprehensive retirement-related risk management” (CRRM) ), one that takes into account linkages among financial and non-financial variables.

One striking fact (I think) here is that this kind of thinking is most likely to take place late in persons’ life courses, after they have learned enough in the “school of hard knocks” to see the wide scope of potential later-life pitfalls, and have seen the reality of cascades of linked pitfalls. Preparing to do CRRM fruitfully is analogous to preparing to deal with systems of equations in algebra, and it probably points to a need for expanded systematic Third-Age learning activity. (In case you think that older brains are not up to this effort, go listen to episode 87 of the Brain Science Podcast. There Dr. Pamela Greenwood from George Mason University, a renowned expert in brain studies and co-author of the recently published "Nurturing the Older Brain and Mind" is interviewed about recent research findings about cognitive functioning in later life. ( Click here to hear the podcast.)