Key demographic trends and their effect on the wood products industry Part I

By / March 23, 2018

In recent Monthly Macroeconomic Advisers, Spotlights on Immigration, and in Forest Economic Advisors (FEA) Forum Presentations, we have been discussing the expectations for the younger adults (ages 20-34) as they enter the labor force, form households and eventually buy singlefamily housing units. There are two major population groups that will be important to housing demand levels and mix over the next 15 years. The first wave was the Baby Boom group that is now 56-70 years old. There are 61 million people in this group.

Population by age graph

As seen in Graph 1, the next big population wave will be 20-34 years old by 2020. There will be about 69 million people in this age group in 2020 according to the Census Bureau’s most recent Reference projections. Historically, this is when young adults begin forming households and buying their first houses.

But, as with any forecast, the expectations for these young adults is based on what previous adults have done as they pass through age 30 and beyond. Unfortunately, there are developments that could alter the rate of household formations and eventually housing purchases for these young adults. The primary issue will be future income growth, especially the ability to save for a down-payment. The crux of the problem is that younger adults are not entering the labor forces at the same rate as their predecessors.

Because of the complicated relationship between employment and future life choices for this crucial demographic group, we will be splitting the discussion into three separate Spotlights. The series will be as follows:

Part I: This spotlight will focus on what is happening to the working pattern for younger adults, particularly for younger men, and how it is likely to affect their employment patterns later in life.

Part II: In the next Spotlight, we will address trends in the propensity for the 20-34 age group to form households and to get married over the next 10 years. We will discuss the range of potential household formations that includes both potential immigration reductions and the declining propensity to form households (the headship rate). Finally, the relationship between marriage and home ownership will be addressed.

Part III: In the last Spotlight, we will summarize the forecasted growth in households by age group. Because of the potential for even lower household formations among the younger age group, growth in household formations will be dominated by the over 65 age group. In the final spotlight, we will look at trends in the labor force for the older aged groups as well.

Part 1

Will young adults (especially men) re-enter the labor force?

The labor force participation rate (this is the ratio of everyone seeking work—both employed and unemployed—to the total population) and the employment rate (the ratio of adults employed to total population) remain below 2007 levels. Although the labor force participation rate (LFPR) has been declining since 2000, the rate of decline accelerated after the Great Recession and has not recovered.

A variety of factors have been at work. The two primary factors driving the decline according to a recent Brookings Institute study written by Alan B. Kruger have been the aging of the Baby Boom (65%) and the sharp decline in younger age group participation rates (25%). In fact, about 90% of the decline in LFPR is explained by these two factors. A quick overview of why the Baby Boom is having such a profound effect is discussed below.

The Kruger study also looked closely at the opioid crisis and its relationship to non-participation in the labor force. The study could not clarify whether drugs create the problem or people who don’t want to work use pain and drugs as a way to get disability payments. However, the study did conclude that people that are currently out of the labor force and using pain drugs are unlikely to return to the labor force.

One reason to examine this trend so closely is to determine how tight the labor supply really is. A puzzle for most economists has been the lack of significant upward wage pressure despite unemployment dropping from 10% to 4%. The sharp decline in the male participation rate is of particular concern to the housing construction and wood products industries.

So let’s take a closer look at what has been happening to LFPR by age group, but particularly younger males. Beyond labor supply issues, the declining LFPR has much broader social implications, such as ability to form households and the ability to afford a house.

LFPR for younger adults: a major U.S. concern

As mentioned above, after the aging of the Baby Boom, the sharp decline in the LFPR of younger adults is a major cause of the decline in the overall LFPR.

The decline in the male LFPR is primarily a U.S. problem, since the decline in the LFPR for men aged 20-24 has not been nearly as dramatic in Canada as in the U.S.

For the 16-19 age cohort, both male and female participation rates have plunged by 15%. The reasons include staying in school, drug usage and for men, playing video games. There is a glimmer of hope for this age group—the rate appeared to stabilize after 2010, but at a low rate of 35%. Also note that the participation rate is now identical for men and women.

For the 20-24 age, the decline in the LFPR has been particularly dramatic for men. It has been declining since 1990, but the rate of decline accelerated after 2000. Although the LFPR for young women fell about 5% since 2000, the LFPR for younger men dropped from 83% to about 73% in the same period. The bad news is that it is still declining. Young men are spending much more time playing video games or on a computer, rather than working. These two events outweigh staying in school. The decline in LFPR is particularly large for men without a college degree. In 1994 about 10% of non-college educated males aged 21-30 were not in the labor force. By 2015, 20% were out of the labor force!

What is disturbing in the study is the much higher level of disabilities and need for pain medicines for those that are out of the labor force versus either employed or unemployed adults.

The study also looked at the relationship between pain levels, drugs and employment status. Either because of disabilities or the need to qualify for disability insurance and Medicaid, men that are not in the labor force have much higher levels of pain and take pain medication as a treatment.

Which brings us to the really critical question: Will the sharp decline in the LFPR as young adults affect the LFPR as for this group as it ages? It appears the answer is yes.

Decline in LFPR U.S. problem

One way to address the question for men is shown in Graph 2. Demographers use this type of graph to see patterns for an age group as they age and to compare one age cohort with another. What they are looking for is a pattern that begins at a young age and persists as that group ages.

For instance, the LFPR rises as that group ages, but a lower starting rate does affect the eventual peak level. For instance, men born in the 1952-61 had a LFPR near 60% when they were 16-19. By the time this group had reached 30, the LFPR hit 95%. But for young men born in 1982-86, their LFPR had dropped to less than 50% at age 16-19, and was less than 90% by age 30.

Bottom Line: Based on this pattern, the even larger drop in the participation rate for men less than age 24 (a similar, but not as dramatic message applies to women as well), would suggest that the LFPR rate for this group will remain lower than earlier age groups as they move into the crucial period over age 30.

Findings of the Brookings Institute also suggest that young men and women that are not currently in the labor force due to disabilities or pain are unlikely to return. The implication for housing demand and single-family starts will be addressed more completely in the Part II Spotlight.

Aging baby boomers and the decline in the LFPR

Labor Force Participation chart

As the table at above shows, the current LFPR rate for adults over age 40 are summarized. The LFPR peaks at age 40 and then drops sharply as people age and approach retirement. The front end of the Baby Boom group is now moving into the 65+ category. With 61 million adults moving past age 56 and shifting towards retirement, that is why the group is pulling the overall LFPR down. However, unlike younger adults, the LFPR for this group is increasing. We will return to this group again in Part III of this Spotlight series. Look for parts II and III of this Spotlight series in the April and May issues of LBM Journal.

Lynn O. Michaelis

A partner with Forest Economic Advisors (FEA), Lynn Michaelis has nearly 40 years of experience in the forest products industry. This article was excerpted with permission from FEA’s “Spotlight.” To learn more, visit www.getfea.com.