ECONREVIEWS: Pandemic labor force participation and net worth fluctuations from Federal Reserve Bank of ST.LOUIS

Sunday, May 28, 2023

Pandemic labor force participation and net worth fluctuations from Federal Reserve Bank of ST.LOUIS

This passage is a summary of the research paper's findings. The researchers argue that the increase in net worth due to booming asset returns in 2020-21 significantly contributed to the drop in labor force participation rates during the same period, especially among older workers nearing retirement.

Key points include:

1. The labor force participation rate (LFPR) for prime-age workers has mostly recovered to pre-pandemic levels, but the LFPR for workers older than 55 seems to have declined permanently.

2. Using a statistical model, the researchers found that the percentage of Americans who have retired is significantly higher than the predicted trend, leading to 3.3 million "excess retirees" as of December 2022.

3. The researchers used a model of wealth effects on labor supply and estimated changes in net worth to explain a significant share of these "missing workers" and "excess retirees". They imputed realized returns on major asset classes to micro data on individual balance sheets and portfolio composition as of 2019 from the Survey of Consumer Finances (SCF). They then applied a model that relates changes in net worth to labor force participation decisions.

4. Depending on whether they considered the population aged 55-70 or everyone aged 55 and older, this exercise helped explain between 28.7% and 51.1% of the drop in LFPR in the 2020-21 period and between 46% and 82% of all "excess retirements".

5. The researchers acknowledge that there are many other reasons, besides wealth effects, why individuals may have chosen to retire during this period. However, they argue that these changes in net worth may have enabled retirements, even if primarily driven by these other reasons.

6. The researchers also note that recent developments in financial markets during 2022 have undone some of these abnormally high returns, especially in the stock market. However, long-run demographic trends related to decreased fertility and population aging create downward pressure on the LFPR, preventing it from returning to its pre-pandemic levels.