The labor force participation (LFP) rate is the share of the population that is employed or unemployed and actively seeking employment. When individuals drop out of the labor force — due to retirement, disability or other life changes that will keep them at home and out of the workforce — the LFP rate falls.

The LFP rate has declined since peaking in 2000 at just over 67% here in California. A steep drop occurred in 2009 during the Great Recession, the losses lingering during the long recovery that followed. During the last decade of recovery, California’s LFP rate has remained roughly two percentage points below the U.S. average.

An even steeper drop in the LFP rate occurred during the 2020 recession, from 62.6% in February 2020 to 59.8% as of September 2020. Today’s lower LFP rate is a big reason why the unemployment rate has recovered quicker than anticipated. That’s because when an individual drops out of the workforce, they are no longer included in the unemployment count, giving a false impression of an improving jobs market. The number of employed individuals is a more important figure for real estate, and employment has dropped from the peak 17.7 million in December 2019 to just under 16 million as of September 2020, reflecting over 1.7 million Californians still without jobs who were employed at the close of 2019.

Real estate professionals who watch the LFP rate, along with jobs numbers, will find these trends more useful for forecasting future economic conditions than the misleading unemployment rate. Expect the LFP rate to remain at its present low level until the pandemic response subsides later in 2021 or 2022.

Chart update 11/02/20

Sep 2020

Aug 2020

Sep 2019

California LFP

59.8%

59.9%

62.0%

U.S. LFP

61.4%

61.7%

63.2%

The global pandemic has upended employment expectations, especially for families with young children and those near retirement. Many working women (and some men) have given up employment income in order to care for children. Others who are near retirement age or with compromised immune systems have chosen to quit work in order to shelter in place. With their exit from the workforce, the LFP rate has dropped, and the unemployment rate has bounced higher than would have been accomplished by this summer’s sparse job additions alone.

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LFP and housing

The LFP rate’s long falling trend is worrisome for the housing market. Freddie Mac calls 2020’s steep detraction from the labor force a sign of “underlying weakness.”

When the LFP rate declines, so does household wealth, especially for that of middle-income households, which often rely on multiple streams of income in a single household. Declining household wealth spells trouble for the long-term health of the housing market.

Since the 1970s when women began to work outside the home in increasing numbers, household income has continuously climbed, rising by 21% in real terms from 1979 to 2018, according to Brookings.

As women make up a disproportionate amount of those leaving the workforce in 2020, household incomes are suffering. Households with reduced incomes will see their housing options stifled.

Folks who chose an early retirement are seeing their housing options dwindling, as well.

Those who were forced into early retirement will enter the next phase of their lives with reduced resources. Many have not reached the age when they begin receiving benefits like social security. Still others were counting on a couple more years of saving before cutting off their streams of income.

When retirees can afford it, they will increasingly stay in their homes for longer, both to avoid moving during the pandemic and due to an increasing reliance on savings which otherwise may have gone toward their next move.

This will prove problematic to the new generation of homebuyers, who rely on a steady churn of housing to fill inventory gaps. New residential construction will need to occur to fill the holes left by aging adults stuck in place.

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Is COVID the end for senior housing?