The rate of participation in labor force: an accurately predicted fall

In August 2009, we made a short term (five years) prediction of the rate of labor force participation, LFPR, in the US as based on our model [1]. A prediction at a longer horizon is also available from the population age pyramid. The contemporary level of LFPR was 65.4%, as reported by the Bureau of Labor Statistics (http://data.bls.gov/cgi-bin/surveymost). We predicted a quick fall in the level of LFPR in 2010:

In order to predict the evolution of the LFPR we used projections of real GDP based on the projections of population. Figure 4 depicts the predicted and observed LFPR curves for the years between 2000 and 2014. In 2010, the rate should drop by approximately 1.3%. When translated into absolute numbers, it gives more than 2,500,000 people leaving the labor force in 2010 at once. Really, the wave of the boomer’s retirement has just started and it is likely that nobody will replace many of them in the labor force.

Figure 4. Prediction of the LFPR evolution in the USA between 2000 and 2014 from the number of 3-year-olds. Flat segment between 2004 and 2009 will end up in a rapid drop by 1.3% after 2010. This is the effect of an elevated (above potential) real economic growth in 2010.

In 2011, the BLS reported the level of LFPR in December 2010. It is 64.3%, i.e. only 0.2% higher than predicted in August 2009. We consider this prediction as an excellent one and thus the model is validated and having a godd predcitive power. Has anybody made a better prediction?

References

1.  Kitov, I., Kitov, O., (2008). The Driving Force of Labor Force Participation in Developed Countries, Journal of Applied Economic Sciences, Spiru Haret University, Faculty of Financial Management and Accounting Craiova, vol. III(3(5)_Fall), pp. 203-222.