Five years ago we published a paper with a model describing the evolution of labor force participation rate, LFP, in developed countries. Among other countries, we presented a prediction for the U.S. We used the change in a younger population cohort and foresaw the fall by 1.5% in 2010. Figure 1 reproduces Figure 8 from the paper. This dramatic fall happened on time. It was a success of the model.
Figure 1. Prediction of the LFP 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.
The predicted curve in Figure 2 was obtained from real GDP per capita as a proxy to the population change (see the article for details). Both curves in Figure 2 almost coincide between 1960 and 2012. The largest deviations are observed in the years of biggest revisions to the LFP after decennial censuses and changes to GDP definitions. Therefore, they can be neglected as having artificial character.
The model predicts the secular change in the LFP!
In 2011 and 2012, the rate of participation is expected to hover near 64.5%, but actually fell to 63.7%. As an option explaining the observed deviation, the rate of GDP growth in 2011 and 2012 could be overestimated. As an alternative, the rate of participation in labor force may rise by 0.7%. This is in line with the predicted fall in the rate of unemployment to 6% by the end of 2013.
Figure 2. Observed and predicted LFP in the U.S.