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Friday, November 18, 2011

The affect of labor force participation rate on corporate revenue

According to the Office of Economic Cooperation and Development (OECD), the labor participation rate is the ratio of the work force to working age population. Bureau of Labor Statistics Data shows this rate is at the same level it was between 1978-1984. Workforce participation is important because it affects GDP and consumer income that is in turn a driver of domestic corporate revenue. The labor force participation rate is further explained in the following video:

Labor Force Participation Rate
Source: BLS.gov, US-PD
To illustrate the above further,  The Smithsonian claims the percent of population over 65 will increase from 13% to 20% by 2050 meaning higher entitlement spending such as social security and medicare, and lower tax receipts at current levels and labor participation rates. 
In terms of corporate revenue from domestic sources, its seems reasonable to claim flat or lower revenues based on domestic spending not attached to government spending. That is to say spending not tied to increasingly expensive government programs will decline based on a greater proportion of the population living on reduced retirement incomes. 

The Labor Force Participation rate is near a 40 year low
The National Academy of Social Insurance states 40% of retirees income comes from Social Security. Since social security income is only a fraction of pre-retirement income, the other 60% would have to make up the difference, which it probably doesn't on average because annuity income from pensions and retirement plans generally has to be budgeted with limited new income from sources other than capital gains and dividends refilling the coffers.
Inflationary pressures that cause the cost of living to rise at a faster rate than incomes can further erode the spending power of Americans in the forthcoming decades. For example, in 2009 and 2010 no Cost of Living Increases or COLA adjustments were issued per the Social Security Administration, yet inflation increased in both the years per the BLS meaning consumer income spending power declined.