October 10, 2012
As class-warfare implicitly breaks out – trumpeted by our political leaders – it seems that there is another, much more relevant, trend that is occurring that strikes at the heart of our nation. With Friday’s jobs number still fresh in our minds, Citi’s Steve Englander takes a look at one small slice of the demographics subject and found a rather concerning and little discussed fact. Employment-to-population ratios among older individuals have gone up in recent years, in contrast to the so-called prime-aged 25-54 cohort, where employment-to-population is much lower than earlier. It seems the real divide in this nation is not between rich and poor but old and young – as the 55-plus (and even more 65-plus) are forced to stay in the workplace as retirement remains a dream (thanks to ZIRP and Keynesianism’s excess crises from boom-to-bust leave median wealth well down – even if the rich are ‘ok’).
Via Steve Englander of CitiFX,
Figure 1 shows the percentage point change in the employment to population for the three age groups since 2007.
One characteristic which is striking is that the employment-to-population ratios for older people based very quickly after the financial crisis hit. In fact, it barely moved in 2007-09 among the 55+ age group. The trend in the 25-54 age group is more sideways than up so far. (As a side comment, it suggests that the drop in the overall employment-to-population probably has a modest demographic component since the lower participation rate of the elderly is being offset by the additional jobs they are finding.)
It is hard to tell what is driving this upturn in older worker participation. We suspect it is a combination of:
1. pure demographics – older people are healthier than in the past;
2. structural retirement issues – it is hard to retire at 65 (or younger) and beyond 80 when the gross national savings rate averages around 15% and the net national savings rate around 3% (and negative since Q4 2008!);
3. the wealth effect – even if QE3 has propped up asset prices, personal wealth is still far off where it was at the beginning of 2008.
For the USD the increase in older people’s employment is probably a modest positive rather than a negative. Compare two situations:
— a) early retirement and consumption out of wealth and;
— b) later retirement and consumption out of production rather than wealth.
The imbalance between national consumption and production (often called absorption) is lower in the second case than the first. If the trend to spend out of income rather than wealth continues, the US current account balance would tend to fall. That said, the actual USD impact thus far is probably modest since the actual shifts are small. A sharper increase in participation rates among the elderly could contribute a stronger USD effect.
The second conclusion is that this may be another avenue by which QE weakens the USD. A big positive impact of QE is via the wealth affect because QE forces lower the discount factor that is applied to any stream of returns. If this pure wealth effect supports consumption because individuals who feel richer consume a portion of their wealth, we have exactly the opposite effect – more consumption but no additional production. This would increase external funding needs. Once could also argue that the lowering interest rates also discourages the inflow of capital, so successful QE will very likely be a USD negative, even if the weaker USD is not the explicit intention of the Fed.(As a last concern, there is the dependence of this wealth on a low discount factor rather than faster topline growth, but we will leave this aside for now.)