A Closer Look

US / Less government revenue will come from the long-term side of declining Labor Force Participation Rate

A low Labor Force Participation Rate (LFPR) means that there are less workers earning taxable income. That translates into less government revenue. Payroll taxes (Social Security and Medicare) total 15% of wages. For an average worker making $40,000 a year that comes to $6,000. When the LFPR drops by 0.1% it means that there will be 180,000 less workers filling the tax bucket. The .1% drop translates into $1Bn less in tax revenue. The .4% drop in October therefore means $4Bn in lost revenue. It adds up quick.

All of the models used to forecast future federal deficits rely on a much higher LFPR assumption than today’s reality. The Congressional Budget Office did a long term forecast of LFPR. The CBO hung its hat on a LFPR that is higher than 62.8%, meaning the forecasts of future tax receipts (and subsequent deficits) were wrong.

The 64.4% assumption the CBO used versus the 62.8% that exists today translates into 4m less workers contributing to the system, and those 4m workers (and their employers) will not pay $25B in payroll taxes. A 1/4 trillion adjustment over ten-years just due to a revision of the LFPR. That\’s real money.

I”ve looked at long-term forecasts for LFPR from CBO and BLS. They all have the participation rate dropping over time, but they do not have the drop occurring in the present. What if the ‘New Normal’ is a participation rate that hangs in the low 60% level for the next decade? It translates into much larger deficits at the Federal and State levels. It means that there will be less consumption as there will be fewer paychecks, and that means a much lower rate of growth of GDP.

So either the LFPR turns around and starts headed higher very soon (and stays higher for another decade), or the USA is in for a prolonged period of sub par growth and very high annual deficits.

Consider this chart of LFPR. The drop is accelerating. What are the odds that the long-term trend towards lower participation is going to turn around soon? I would say, “Not high”.

Chosen excerpts by Job Market Monitor. Read the whole story at 

Zero Hedge

via On The Labor Force Participation Rate | Zero Hedge.

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