Editorial Type: ARTICLES
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Online Publication Date: 01 Aug 2011

The Markov Process Model of Labor Force Activity: Extended Tables of Central Tendency, Shape, Percentile Points, and Bootstrap Standard Errors

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Article Category: Research Article
Page Range: 165 – 229
DOI: 10.5085/jfe.22.2.165
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Abstract

This paper updates the Skoog-Ciecka (2001) worklife tables, which used 1997–1998 data, and the Krueger (2005) worklife tables, which used 1998–2004 data. The present paper uses data generated by the methodology Krueger devised in his 2003 PhD dissertation. We have pooled the data beginning January 2005 and continuing through December 2009, a period of five years, using observations matched a year apart. Thus, we have roughly four times the data in the first of the previous studies, and about that of the second. We chose this period for a variety of reasons, including recency, business cycle and trend considerations. The result is the most current and disaggregated set of worklife tables, along with extended probability calculations and statistical measures available to forensic economists.

I. Introduction

Worklife expectancy within the Markov model remains the current paradigm employed by forensic economists to calculate time in and out of the labor force resulting from mortality and transitions into and out of activity. Its use is commonly dated to Smith (1982) and the Bureau of Labor Statistics Bulletin 2135, which announced the change from the conventional model; but the model goes back much earlier. Two living states, active and inactive, are employed and continue to be used in the worklife tables that are in most common use.

This paper updates the Skoog-Ciecka (2001a and 2001b) worklife tables, which used 1997–1998 data, and the Krueger (2004) worklife tables, which used 1998–2004 data. The present paper estimates probability mass functions introduced by Skoog and Ciecka (2001a and 2002) with data generated by the methodology in Krueger (2003). We have pooled the data beginning January 2005 and continuing through December 2009, a period of five years, using observations matched one year apart. Thus, we have roughly four times the data in the first of the previous studies, and about that of the second. We chose this period for a variety of reasons, including recency, business cycle, and trend considerations. The result is the most current and disaggregated set of worklife tables, along with extended probability calculations and statistical measures, available to forensic economists.

The paper is organized as follows. Section II contains a discussion of period and cohort tables, business cycles, and trends. Section III explains notation and recursions used to calculate worklife expectancies and other distributional characteristics of time in the labor force. Our data set and its properties are discussed in Section IV. Section V is the heart of the paper. It contains worklife expectancy tables and many other characteristics of time in the labor force by gender, age, and education. Section VI is a brief conclusion. The paper ends with an appendix analyzing pooled labor force activity data when trends may be present in the data. We prove the theorem: ignoring trend in data pooled across several years results in unbiased estimates of what would be trend-corrected transition probabilities at the mid-point of a sample.

II. Methodology and Commentary on Markov Worklife Expectancy Issues

We adopt the Markov model1 applied to Current Population Survey (CPS) data2 as our methodological vehicle. The building blocks of the Markov model are survival probabilities, taken from the latest U.S. Life Table, and transition probabilities, depicting the probability of ending up in the active state (A), conditional on having been in the active or inactive state (I) in the previous year.3 These probabilities are denoted by A pxA and I pxA, respectively, for a person age x in a particular sex-education group. Letting ppx denote the age x labor force participation rate, these quantities are connected by the Balance Equation:

Thus, given a starting participation at an age at which a group enters the labor force, the pair of transition probabilities at this and all later ages determines that group's participation rates. The reverse is not true—roughly transition rates provide twice the information that participation rates do. Nevertheless, over time, participation rates rise when either rates of entry into activity from activity (A px A) or from inactivity (I pxA) rise, and fall in the opposite circumstances. Participation rates have received more attention than transition rates in the general economics literature and in the popular press, especially when changes in behavior are alleged to have occurred.

The Period Assumption: No Extrapolation of Trends in Mortality or Transition Probabilities (or Labor Force Participation)

Bulletin 2254, the last Bureau of Labor Statistics (BLS) worklif expectancy tab e, began with the words “It is estimated that if mortality conditions and labor force entry and exit rates held constant at levels observed in 1979 to 1980 ....” (p. 1)

This statement makes it clear that the BLS worklife methodology did not attempt to estimate trends in either mortality or in transition probabilities. We call this the period assumption, or equivalently, the constancy benchmark. We make the same assumptions about the constancy of mortality and transition probabilities in this paper.

Regarding mortality, the analogous actuarial construct is that of a period life table. We use the most recent such table, the U.S. life table, here the 2006 table, released June 28, 2010.4 Although we do not use them in this paper, we note that from time to time the Social Security Administration publishes cohort life tables; the ost recent are found in Study No. 120 with mortality projected to 2100 (Bell and Miller, 2005). A graphical depiction of the projection of these trends on life expectancy at birth is produced in Figure 1.5 Past mortality improvements cited in Study 120 include those due to improved medical care, sanitation, diet, vehicle safety, and the general standard of living. Study 120 anticipates future trends in mortality that will be influenced by factors (not necessarily all life enhancing) such as new diagnostic, surgical, and life sustaining techniques; misuse of drugs and prevalence of smoking; environmental pollutants and new diseases; health education and people assuming personal responsibility for their health; violence; and society's willingness to pay for health care. Finally, Study No. 120 notes various periods over the twentieth century when mortality changed at different rates for different subpopulations, and observes that the relatively larger mortality improvements have been for those under 65. The study projects that mortality reductions for the aged will be relatively greater than in the past, based on cause of death data for heart disease, cancer, vascular disease, violence, respiratory disease, diabetes mellitus, and other causes.

Figure 1. Life Expectancy at Age Zero by Gender and Calendar YearFigure 1. Life Expectancy at Age Zero by Gender and Calendar YearFigure 1. Life Expectancy at Age Zero by Gender and Calendar Year
Figure 1. Life Expectancy at Age Zero by Gender and Calendar Year

Citation: Journal of Forensic Economics 22, 2; 10.5085/jfe.22.2.165

Figure 2. Participation Rates by Major Segments of Labor ForceFigure 2. Participation Rates by Major Segments of Labor ForceFigure 2. Participation Rates by Major Segments of Labor Force
Figure 2. Participation Rates by Major Segments of Labor Force

Citation: Journal of Forensic Economics 22, 2; 10.5085/jfe.22.2.165

Similarly, the BLS, macroeconomists, labor economists, demographers, and others project future labor force participation. Every two years, the BLS issues labor force projections, the most recent of which are from November 2009 and contain projections of participation rates to 2018. Nevertheless, the BLS chose not to incorporate labor force projections into its worklife expectancy methodology. The BLS chose not to attempt to project changes in future transition probabilities or (per the Balance Equation) labor force participation rates. We agree with that decision, and we discuss our reasons in the next several paragraphs.

Two general sources of changes over time might be considered—movement during business cycles and the effects of long-term trends. To be useful, worklife tables need to apply throughout the business cycle, especially since cycles are dated well after the fact, and projecting when any current cycle might end should be left to business economists. One objection to forecasting trends is that, in the simpler demographic life tables as discussed above, cohort tables where this has been done have not met market tests, i.e., they have not been generally used or become generally accepted. Even if the market were to accept mortality projections, in light of the economic theory discussed below, it is not at all clear in which direction the associated “trend corrections” for labor force participation would or should take us. With no a priori argument for bias associated with maintaining the status quo or period assumption, we elect to maintain it. We treat business cycles first and long-run trends in labor force participation next. In an appendix, we provide econometric results which permit the interpretation and justification for our averaging methodology, viz., that it is robust to trends, in the sense that, whether trends exist or not, our methods acknowledge and capture their value at our sample mid-point, and then sensibly decline to project them into the future.

Business Cycle Expansions and Contractions

Bulletin 2254 clearly states that the business cycle must be sensibly incorporated in the selection of the time period for the data used.

The multi-state working life table model is extremely sensitive to rapid changes in rates of labor force entry or withdrawal. Tables based on a recessionary period, during which labor force exits increase, present a very bleak picture of lifetime labor force involvement. Conversely, those calculated during periods of rapid recovery or expansion tends to overstate the average degree of lifetime labor force attachment. To avoid the problems caused by the cyclical swings of the early 1980's, the current study rests on data from a somewhat earlier but less turbulent period, 1979 to 1980. (p. 2)

Bulletin 2254 and previous BLS studies, as well as the Ciecka, et al. papers which carried on the BLS tradition during the 1990s, continued to use only one year's matched data (generated from two consecutive years of data). Krueger (2004) pooled several years' data, which included years of expansion and the 2001 contraction; and Millimett et.al. (2003) pooled data from 1992 to 2000.

The National Bureau of Economic Research (NBER) has a Business Cycle Dating Committee which officially determines peaks and troughs in U.S. economic activity; it determines when recessions begin and end. It has recently determined6 that the last U.S. contraction began in December 2007 and ended in June 2009. Therefore, from January 2005 through November 2007 our data contained 12+12+11=35 months of expansion, followed by 1+12+5=18 months of contraction, followed by seven months of expansion. We thus have 42 months of expansion and 18 of contraction, a ratio of 2.33 to 1. From 1854 through 2009 there have been 33 business cycles; the averages over business cycles are 42 months of expansion and 16 months of contraction. So, our data are very representative of historical experience, although the most recent cycle's 18-month contraction is the largest since the Great Depression. Consequently our sample contains both expansion and contraction, in appropriate proportions, and so our choice of data has reasonably neutralized any business cycle bias. Finally, labor force entry and withdrawal may be related to unemployment rates. We note that there is close agreement between the unemployment rate of 5% in our sample period whereas the unemployment rate throughout the latest business cycle (March 2001 to December 2007) was 5.2%.

Long-Run Trends and Economic Theory

All of the factors influencing the decline in mortality indirectly influence labor force participation (LFP) in the sense that as more years are lived, more consumption must be financed from earned income, savings, and interest accumulated. Other mortality factors, e.g., those affecting health, also affect LFP directly, since health (and wealth) are well known determinants of labor supply. Without incorporating mortality projections, it already appears inappropriate and inconsistent to independently project LFP changes.

Labor force participation reflects individual choice; consequently many additional factors unrelated to mortality changes will partially cause LFP changes. Examples include culture/changing social mores, incentives to work, returns to education and experience, and the overall level of productivity of the economy. Included among incentives are income tax rates, penalties for the early election of Social Security, rewards for the delayed election of Social Security and the ease, and success with which Social Security disability may be claimed. Recent shocks in the stock market (affecting wealth and retirement decisions) and continuing globalization (discouraging workers with lesser skills) are likely responsible for increasing LFP in some groups and decreasing LFP in others. Projecting how these underlying factors and social policies will change is a daunting challenge. Further, we do not observe any such comprehensive efforts.

It is important to realize that economic theory suggests that the results of change do not imply a bias in maintaining the assumption of no change. There are many factors, operating to increase as well as decrease LFP, and the question is empirical. For example, secularly increasing wealth results in lower labor supply and earlier retirement—leisure is a superior good. More education and higher wages imply a higher opportunity cost of leisure, implying the opposite LFP effect. Despite the greater pension reduction for age 62 retirements which began in 2000, the average age at which Social Security has been elected has remained virtually unchanged. While fewer workers are covered by defined benefit programs (postponing retirement and thereby increasing LFP), the increased relative value of Social Security disability benefits for low wage earners may decrease LFP.

There is widespread interest among economists generally in labor force participation, but that interest is primarily concerned with aggregates. We can write the economy-wide for groups i at time t, where pctti is the percent of the labor force in group i at time t. Over time, LFPt changes both because the composition of the groups, the pctti changes (e.g., baby boomers aging), and because participation within groups, LFPti changes (e.g., cohort effects—some generations “work harder”). The popular press and many economic studies focus on LFPt, whereas it is the LFPti which is of most interest to forensic economists.

To appreciate the effects of trend, cycle, and aggregation, the following chart is instructive (Daly and Regev, 2007). The long term decline of prime age males appears to have stabilized as does the upward trend of prime age females. Trends for the young have come and gone, and participation for the aggregate of older men and women appears to be increasing. None of these graphs disaggregate by education level or activity status, making them of limited use for forensic economists. Nonetheless, they suggest the desirability of calculating new worklife tables from time to time.

When we pool several years of data so that the business cycle averages out, the possibility remains that there are trends in the sample data. This issue could not arise when only one year's matched data were used. Statistical theory indicates that it is appropriate to estimate with an average when the data come from the same distribution—a condition which is violated in general if trends are present. Our statistical theory developed in the appendix provides us with the natural multi-period analogue of the period assumption for life tables—use the poole data, interpreting it per the appendix as the values at the sample midpoint.

III. Notation and Recursions for the Markov (Increment-Decrement) Model7

Let x denote a person's exact age with BA being the youngest age at which labor force activity can occur. Everyone must have either left the labor force or died by truncation age TA. Letm ∈ {a,i}, and n ∈ {a, i, d} where a denotes active in the labor force, i enotes inactive, and d the death state. The transition probability denotes the probability that a person in state m at age x will be in state n at age x + 1. Any person alive, whether in state a or i, at age TA − 1 = 110 transitions to state d at age TA. We assume that mortality probability and activity status are independent, i.e., . Transition probabilities incorporate mortality, and the only restrictions on them are that , and .

YAx,m denotes the random variable of future time in the labor force for a person who is in state m at age x, and pYA(x, m, y) measures the probability that a person in state m at age x will accumulate y additional years in the labor force. That is, pYA (x, m, y) measures the probability that YA x, m = y; and the set of pYA(x, m, y) for all possible values of y, constitutes the probability mass function (pmf) for YAx, m . The pmf ultimately depends on the transition probabilities mpxn which are primitive to the Markov model. Transitions between states are assumed to occur at the mid-point between ages.8

Recursions defining pYA(x, m, y,) consist of global conditions, boundary conditions, and main recursions. Global conditions (1a)–(1d) refer to extreme values of y and x as well as conditions that hold at all ages. Boundary conditions (2a)–(2c) deal with probabilities of future activity being either 0 or .5 of a year. Main recursions (3a)–(3b) capture probabilities of future activity for y years exceeding values defined by the boundary conditions (Skoog and Ciecka 2002).

Years of Activity Probability Mass Functions for YAx,m = y for m ∈ {a,i} with Mid-Year Transitions

Global Conditions

(1a)  (1b)  (1c)  (1d) 

Boundary Conditions for x = BA,…,TA − 1

(2a)  (2b)  (2c) 

Main Recursions for x = BA,…,TA − 1

(3a)  (3b) 

Global condition (1a) says that future years of activity cannot be negative nor can they exceed TAx –.5 years. The latter condition holds because everyone alive at age x dies or leaves the labor force prior to age TA. Since everyone has died prior to age TA, the probability of zero active, or inactive, time at age TA is 1.00 as expressed in (1b). Global condition (1c) expresses the assumption that transition to the death state does not depend on activity status. The last global condition, (1d) says that every person alive at age TA − 1 transitions to the death state.

Boundary condition (2a) expresses the impossibility of no future time in the labor force if a person were active at age x since at least .5 of a year of activity must accrue before any mid-year transition can occur. Condition (2b) gives the probability that a currently active person accumulates exactly one-half year of activity by either dying at age x +.5 or by transitioning to inactive and remaining inactive thereafter. Boundary condition (2c) gives the probability an inactive person accumulates no additional labor force time by either transitioning to the death state or remaining inactive after age x.

The remaining probability mass values are defined by the main recursions. The right-hand side of (3a) is the sum of two terms that contribute to the probability that currently active person age x will accumulate y years of future activity: (1) The first term is the product of two factors. pYA(x+1, a,y–1) is the probability that a person active at age x + 1 will have y − 1 years of future activity and, when multiplied by , adds another year of activity at age x. (2) The second term also is the product of two factors. The latter factor pYA (x +1,i, y −.5) is the probability that a person inactive at age x + 1 will have y − .5 years of future activity and, when multiplied by yields an additional one-half year of activity at age x. The second factors in both terms aggregate sample paths resulting from remaining active for y – 1 years and y −.5 years from age x+1, respectively; and their respective multipliers and induce an additional one whole year and one-half year of activity, respectively. The right-hand side of (3b) is the sum of two terms that contribute to the probability that an inactive person age x will accumulate y years of activity: (1) The first term is the product of two factors. pYA(x + 1,a, y − .5) is the probability that a person active at age x + 1 will have y −.5 years of future activity and, when multiplied by , yields an additional one-half year of activity at age x since the transition to activity occurs at midyear. (2) The second term also is the product of two factors. The latter factor pYA(x + 1,i,y) is the probability that a person inactive at age x + 1 will have y years of future activity and, when multiplied by , adds no additional activity at age x.

Our goal is to find the exact probability distribution of the years of activity random variable YAx, m within the context of the Markov model and then compute its characteristics. The foregoing recursions not only accomplish that task, but they do so in a computationally efficient manner. Once transition probabilities have been estimated, these recursions yield the exact distribution of YA x, m in a few seconds of computer time. The computational efficiency itself is remarkable when one considers the number of sample paths of activity, inactivity, and death that could occur; and each path makes its own contribution to the pmf of Yx, m. In general, 2TA–x1 sample paths can occur for a person currently age x. For example, if we consider a person age x = 20, then there are 2111–20 – 1, or approximately 2.4759x1027 paths to consider. Half that many paths are possible for a person age 21, and half again as many for a person age 22, and so on.9

We calculate characteristics of YAx,m with the following formulae:

The expected value of YAx,m (i.e., worklife expectancy or average years of labor force activity) for people in state m (active or inactive) at age x is defined by10

(4a) 

The median value ymed of YAx, m possess the property that

(4b) 

and the mode ymode of YAx, m is the value of YAx, m that fulfills the inequality

(4c) 

The variance, standard deviation, skewness, and kurtosis are defined by

(4d)  (4e)  (4f)  (4g) 

Cumulative probabilities occur at values of YAx,m where

(4h) 

for α= .10,.25,.75,.90.

IV. Data Period and Calculation of Labor Force Transition Probabilities

We utilize the U.S. labor force experience during 2005 to 2009 in our empirical work. The BLS estimates U.S. labor force participation using the Current Population Survey (CPS). The annual, non-seasonally adjusted, U.S. labor force participation rates from 2005 to 2009 are shown in Table 1. According to the Bureau of Economic Analysis, real GDP growth was 3.1% in 2005, 2.7% in 2006, 2.1% in 2007, 0.4% in 2008, and −2.4% in 2009. From 2005 to 2009, male and female labor force participation rates distinctly fell at ages 16 to 19 years. In general, male participation rates through age 49 declined during 2005 to 2009 while male labor force participation rates at ages 50 and over increased. For females, labor force participation changes were mixed during 2005 to 2009 for ages 20 to 49 and then increasing in every age group starting at age 50. Fitting with a long-term trend, the labor force participation rate for males ages 16 and over continues in its slow decline during 2005 to 2009. Female labor force participation rates for ages 16 and over have been flat since the mid-1990s. The average U.S. labor force experience from 2005 to 2009 does not present empirical anomalies which would noticeable impact worklife expectancy estimates.

Table 1 BLS Published Estimates of Labor Force Participation Rates, by Gender, Age, and Years
Table 1

Using the monthly outgoing rotations11 of the CPS from January 2005 through December 2009, we were able to match 74.3% of CPS respondents' one-year-apart records of their labor force status (471,722 matching person-records). As shown in Table 2, the labor force participation and unemployment rates in the matched sample for persons ages 16 and over are the same as the BLS published averages from January 2005 to December 2009. In Table 3, we show the differences between the BLS and matched sample labor force participation rates by age and gender.

Table 2 Comparison of Matched CPS Sample and BLS Estimates of Labor Force Participation and Unemployment Rates, by Gender, 2005–09
Table 2
Table 3 Comparison of Matched CPS Sample and BLS Estimates of Labor Force Participation Rates, by Gender and Age
Table 3

Using the matched person records from the CPS, we are able to estimate the average size of the U.S. non-institutional population by age, gender and eight educational levels by their labor force status at one-year-apart intervals iNxi, iNxa, aNxi, aNxa. In order to compute transition probabilities, we also require the input of the proportion of persons dying between ages x and x + 1, qx, and the number of survivors in the population at each age x, lx, which is computed from qx. Since survivor data are not available by the last state participation before death or by education, we rely on the U.S. Life Tables 2006 (Arias, 2010) that gives survivor data by gender and age.

Mortality data are published for exact ages x, and they represent the probability of survival from one exact age to the next age. However, since the CPS population activity data are based on surveyed age reported in integers values only, age in the CPS has an expected value as x + ½. Therefore, when we compute the transition probabilities, we re-center the survey data to exact ages by taking the average of the surveyed population size across the range of x ± ½ by averaging two consecutive ages in the survey data (e.g., for exact age 17 transition probabilities, we use the average survey data for ages 16.5 and 17.5). Using the identities in equations (5a)–(5d), the four transition probabilities computed from the survey data for exact age x are:

(5a)  ()5b  (5c)  (5d) 

V. Worklife Expectancies and Other Distributional Characteristics of Time in the Labor Force

Skoog and Ciecka (2001b) provided tables for the following educational categories:

  • (1) those with less than high school,

  • (2) high school or a GED grouped together,

  • (3) some college,

  • (4) bachelor's degree,

  • (5) graduate degree, and

  • (6) all educational groupings combined.

Krueger (2004) provided tables for the following educational categories:

  • (1) those with less than high school,

  • (2) high school or a GED grouped together,

  • (3) some college,

  • (4) bachelor's degree or better, and

  • (5) all educational groupings combined.

Since the publication of previous tables, we have learned through our work and the work of others 12 that those who attained a GED should be separated from those who earned a high school diploma. We find that having a GED adds to worklife expectancy compared to those without a high school diploma, but that a high school diploma adds more to worklife expectancy than a GED. Further, those attending college but not earning a BA degree (“some college, no degree”) may be divided into those earning an academic associates degree and those with no degree. Finally, those attaining a college degree can usefully be divided into those earning a bachelor's degree, a master's degree, and those earning a PhD or a professional degree.

Our ability to provide these detailed breakouts without suffering an increase in the standard errors of our estimates depends on our ability to exploit more than a year of data. Indeed, the proof of this assertion is in the size of the associated standard errors, which generally are not reported.13 We show those standard errors in our tables, and sample size is the determinant as to whether they will be small. It is important to recognize that there are two notions of standard error, one small and one large; and we report both, although they refer to very different concepts. The standard error with which we estimate the mean or the median of additional years of activity is very small, attesting to a small “known error rate.” However, the standard error (the square root of the variance) in the population years of additional activity is intrinsically much larger—one might die tomorrow or in 50 years, and one might retire in advance of or in arrears of a traditional age such as 65.14

Tables 4–35 contain our main results.15 We utilize eight educational groups:

  • (1) zero to 12 years of education but no high school diploma or GED,

  • (2) GED but no high school diploma,

  • (3) high school diploma but no college,

  • (4) some college but no degree,

  • (5) associate's degree but no bachelor's degree,

  • (6) bachelor's degree but no master's or higher degree,

  • (7) master's degree but no professional degree or PhD, and

  • (8) professional degree or PhD.

Table 4 Characteristics for Initially Active Men with 0–12 Years of Education, No Diploma, No GED
Table 4

Tables 4–11 are for initially active men by the foregoing eight education groups. Tables 12–19 are for initially inactive men separated into the same educational groups. Tables 20–27 are for initially active women and Tables 28–35 for initially inactive women by education. Tables 36 and 37 contain worklife expectancies for men and women by education but without regard to initial labor force status. Tables begin at age 16 for groups (1) and (2), at age 17 for group (3), at age 18 for group (4), at age 19 for group (5), at age 20 for group (6), at age 22 for group (7), and at age 24 for group (8).16 Tables end at age 75 for all educational groups.

Table 5 Characteristics for Initially Active Men with GED, No Diploma
Table 5
Table 6 Characteristics for Initially Active Men with High School Diploma
Table 6
Table 7 Characteristics for Initially Active Men with Some College, No Degree
Table 7
Table 8 Characteristics for Initially Active Men with Associate's Degree
Table 8
Table 9 Characteristics for Initially Active Men with Bachelor's Degree
Table 9
Table 10 Characteristics for Initially Active Men with Master's Degree
Table 10
Table 11 Characteristics for Initially Active Men with Professional or PhD Degree
Table 11
Table 12 Characteristics for Initially Inactive Men with 0–12 Years of Education, No Diploma, No GED
Table 12
Table 13 Characteristics for Initially Inactive Men with GED, No Diploma
Table 13
Table 14 Characteristics for Initially Inactive Men with High School Diploma
Table 14
Table 15 Characteristics for Initially Inactive Men with Some College, No Degree
Table 15
Table 16 Characteristics for Initially Inactive Men with Associate's Degree
Table 16
Table 17 Characteristics for Initially Inactive Men with Bachelor's Degree
Table 17
Table 18 Characteristics for Initially Inactive Men with Master's Degree
Table 18
Table 19 Characteristics for Initially Inactive Men with Professional or PhD Degree
Table 19
Table 20 Characteristics for Initially Active Women with 0-12 Years of Education, No Diploma, No GED
Table 20
Table 21 Characteristics for Initially Active Women with GED, No Diploma
Table 21
Table 22 Characteristics for Initially Active Women with High School Diploma
Table 22
Table 23 Characteristics for Initially Active Women with Some College, No Degree
Table 23
Table 24 Characteristics for Initially Active Women with Associate's Degree
Table 24
Table 25 Characteristics for Initially Active Women with Bachelor's Degree
Table 25
Table 26 Characteristics for Initially Active Women with Master's Degree
Table 26
Table 27 Characteristics for Initially Active Women with Professional or PhD Degree
Table 27
Table 28 Characteristics for Initially Inactive Women with 0-12 Years of Education, No Diploma, No GED
Table 28
Table 29 Characteristics for Initially Inactive Women with GED, No Diploma
Table 29
Table 30 Characteristics for Initially Inactive Women with High School Diploma
Table 30
Table 31 Characteristics for Initially Inactive Women with Some College, No Degree
Table 31
Table 32 Characteristics for Initially Inactive Women with Associate's Degree
Table 32
Table 33 Characteristics for Initially Inactive Women with Bachelor's Degree
Table 33
Table 34 Characteristics for Initially Inactive Women with Master's Degree
Table 34
Table 35 Characteristics for Initially Inactive Women with Professional or PhD Degree
Table 35
Table 36 Worklife Expectancy and Bootstrap Estimates for Men without Regard to Initial State
Table 36
Table 36 continued
Table 37 Worklife Expectancy and Bootstrap Estimates for Women without Regard to Initial State
Table 37
Table 37 continued Worklife Expectancy and Bootstrap Estimates for Women without Regard to Initial State
Table 37 continued

To illustrate the results reported in Tables 4–35, consider 35-year-old men with bachelor's degrees but without graduate degrees in Table 9. Such men have worklife expectancies of 27.52 years. The median additional time in the labor force is 28.50 years, and the mode is 29.50 years. The distribution of additional labor force time shows negative skewness with a value of −.63 as would typically be the case when the mode exceeds the median which exceeds the mean (WLE).17 Kurtosis is 4.06 indicating a pmf that has more probability mass around its peak and in its tails, but less probability mass between the peak and tails, than a normally distributed random variable. The standard deviation is 7.34 years. This is the standard deviation of additional time in the labor force—the usual measure of dispersion around the mean. Table 9 also shows the 10th (18.50 years), 25th (23.50 years), 75th (32.50 years), and 90th (35.50 years) percentile points. The interpretation is, for example, that only 25% (i.e., 1 − .75) of 35-year-old men with bachelor's degrees will be in the labor force for 32.50 years or more. We use Table 38 to illustrate the detailed calculations that underlie the forgoing results, keeping in mind that a table similar to Table 38 underlies each single row in Tables 4–35. Columns A and B of Table 38 comprise the pmf for 35-year-old active men with bachelor's degrees as illustrated in Figure 3. Column C is the accumulation of the probabilities in Column B, and we note the sum is 1.0000. Entries in Column A and C that yield the 10th, 25th, 50th, 75th, and 90th percentile points, as well as the mode, are highlighted (see 4b, 4c, and 4h). Column D contains the products of y and pYA(x, m, y); and their sum, worklife expectancy, is highlighted on the bottom of Column D (see 4a). Columns E, F, and G develop the variance (4d), standard deviation (4e), skewness (4f), and kurtosis (4g), all highlighted at the bottom of the table.

Figure 3. Probability Mass Function for Active Men Age 35 with BA DegressFigure 3. Probability Mass Function for Active Men Age 35 with BA DegressFigure 3. Probability Mass Function for Active Men Age 35 with BA Degress
Figure 3. Probability Mass Function for Active Men Age 35 with BA Degress

Citation: Journal of Forensic Economics 22, 2; 10.5085/jfe.22.2.165

Table 38 Distributional Characteristics of Active Men Age 35 with BA Degrees
Table 38

Bootstrap estimates of worklife expectancies and their standard errors are shown in the last two columns of Tables 4–35.18 Each bootstrap estimate is based on our CPS matched sample sizes by age, gender, educational attainment, labor force status, and an assumed sample size of 10,000 for mortality. We used 100 bootstrap replications for each row in Tables 4–35. Continuing to use 35-year-old initially active men with bachelor's degrees as an illustration, Table 9 shows 27.55 as the bootstrap estimate of worklife expectancy, a number quite close to the reported mean of 27.52 years. The bootstrap standard error of the worklife expectancy is .29 years. We draw a sharp distinction between the standard deviation of years of activity (7.34 years) and the standard error of estimated worklife (.29). The former refers to variation in years of activity itself while the latter measures variation in the sample mean (worklife expectancy). Said differently, years of time in the labor force can differ from worklife by several years, but there is little variation in the estimate of worklife.

Tables 36 and 37 contain worklife expectancies, bootstrap worklife expectancies and bootstrap standard errors for men and women by age and education but without regard to initial labor force status.19 We can think of these worklife expectancies as weighted averages of their age, gender, education, and initial status counterparts where the weights are participation rates for initial actives and one minus participation rates for inactives. Bootstrap standard errors are based on 100 replications and our CPS matched sample sizes.

We conclude our tabulated results with some comparisons between our current work and two commonly used worklife studies. Table 39 contains worklife expectancies for initially active and initially inactive men and women with less than high school educations taken from Skoog and Ciecka (2001b), Krueger (2004), and the present study.20 Worklife expectancies in the present study for initially active men exceed those reported by Skoog-Ciecka; the range being approximately .3 years to 1.4 years depending on age. Relative to Krueger, the present study has worklife expectancies approximately .6 years smaller to .9 years larger. For initially inactive men with less than high school, the present paper has bigger worklife expectancies than Skoog-Ciecka by as much as approximately 1.8 years for men in their late 30s. Relative to Krueger, differences range from .8 years to .3 years. For initially active women with less than high school, worklife expectancies in the present study differ from Skoog-Ciecka by .8 years to .6 years; the range relative to Krueger is .3 years to .7 years. For inactive women, the range is 1.1 years to .8 years with Skoog-Ciecka and −.5 years to .8 years relative to Krueger.

Table 39 Worklife Expectancies in 1997-98, 1998-2004, and 2005-09 for Men with Less Than High School*
Table 39

Table 40 shows worklife expectancies for initially active and initially inactive men and women with Bachelor's, but not higher, degrees as reported by Skoog-Ciecka and in the present study. For initially active men, the present study contains worklife expectancies uniformly smaller than Skoog-Ciecka but the range is only approximately zero to .3 years. Almost all of the differences in worklife expectancies are negative for initially inactive men with a range of approximately .1 year to 1.2 years. Falling worklife expectancies for men are contrasted with increasing worklife expectancies for women in Table 40. Women's worklife expectancies increased at all ages for both initially active and inactive women with increases being in the range of 1.0 to 1.5 years from the youngest ages to approximately age 60.

Table 40 Worklife Expectancies in 1997–98 and 2005–09 for Men and Women with Bachelor's Degrees*
Table 40

VI. Conclusion

We produced extended tables of labor force activity by age and gender based on the Markov model. Tables contain three measures of central tendency (mean or worklife expectancy, median, and mode), three measures of shape (standard deviation, skewness, and kurtosis), and four percentile points (10th, 25th, 75th, and 90th). Tables also contain bootstrap estimates of worklife and their standard errors. The pooled matched sample data, upon which our results are based, yield estimates of participation rates and unemployment rates that are in close agreement with their nationally reported counterparts, thereby providing a measure of consistency of our sample data and nationally reported labor force statistics. We discussed the relationship between our empirical work and period and cohort tables, business cycles, and trends. We also proved a new theorem: pooling data across several years but ignoring trend still produces unbiased estimates of what would be trend-corrected transition probabilities at the mid-point of a sample. We believe this work is the most current and disaggregated set of worklife tables, along with extended probability calculations and statistical measures, available to forensic economists.

References

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  1. The monthly CPS data is discussed in Ciecka, Donley, and Goldman (2000) and Krueger (2004). We follow Krueger's methodology and matching algorithms, working with the outgoing rotation samples.

  2. We use capital letters A and I when we condition on survival. Later, we use lower case a and i when transition probabilities are adjusted downward to allow for mortality probability.

  3. Cohort tables typically reflect mortality probabilities from a series of period tables for past years and projections of future mortality. For example, for a newborn in 1980, the mortality probability in a cohort table at age 10 may be the mortality probability for a 10-year-old person taken from a period table for 1990 when the newborn from 1980 would be 10 years old. There will be no period tables available beyond a certain age (approximately age 30 for a person born in 1980), and future mortality must be projected to complete a cohort table.

  4. See Krueger (2004) for a comprehensive list of almost 100 references on worklife expectancy, the Markov Model, and many other labor-force related topics in economics, demography, and actuarial science.

  5. Other transition points are possible. For example, we might think of transitions between states occurring at the end of the year (beginning of year). The pmf based on end-of-year (beginning-of-year) transitions is one-half unit to the right (left) of its mid-year transitions counterpart. Therefore, the mean and all percentile points increase (decrease) one-half year as we move from mid-year to end-of-year (beginning-of-year) transitions; but the variance, standard deviation, skewness, and kurtosis remain unchanged. When starting inactive, pmf's for activity do not depend on the time of transitions; therefore all measures of activity are the same under mid-year, beginning-of-year, and end-of-year timing assumptions.

  6. Of course, some paths occur with very low probability as, for example, the probability of a very old person reentering the labor force after being inactive.

  7. Worklife expectancy for people initially active also can be computed in the following manner: Assume alx actives at age x and ilx = 0 inactives. Use the recursions and from age x+1 to age TA −1. Then, gives worklife expectancy at age x with mid-year transitions for initial actives. For those initially inactive, we use the same recursions; but we start the process by assuming that there are ilx inactives at age x and alx = 0. Then gives worklife expectancy at age x with mid-year transitions for initial inactives.

  8. Outgoing rotations refer to persons answering the 4th and 8th interviews in the CPS eight interview survey sequence. Usage of the out-going rotations (a) ensures that persons are not counted more than once and (b) allows the matched sample to be weighted to represent the labor force experience of the entire U.S. population. The data selection and weighting process is presented in detail in Krueger (2004).

  9. See Cameron and Heckman (1993), Heckman and Rubinstein (2001) and an unpublished paper of our own.

  10. The major exception has been Skoog and Ciecka (2004), but standard errors of the mean also appeared in Millimet, Nieswiadomy, Ryu, and Slottje, (2003).

  11. We can, of course, estimate this standard error of the sample standard derivation, so that our estimate of this notion of standard error in turn has a standard error.

  12. We use CPS data and U.S. life tables as previously described and formulae (5a)–(5d) to estimate transition probabilities. Recursions (1a)–(1d), (2a)–(2c), and (3a)–(3b) combined with estimated transition probabilities produce estimated probability mass functions for years of labor market activity. We then apply formulae (4a)–(4h) to generate the estimated characteristics in Tables 4–35.

  13. In regard to worklife expectancies, there is less than 5% difference between 0 to 8th grade versus 0 to 12th grade; no difference for 0 to 1 years of college versus people with some college; 2% or less difference between Associates Academic and Associates Vocational; and, with its relatively lower sample sizes, a 4% difference between professional and PhD degrees.

  14. The relationship between skewness and the mean, median, and mode is not always as expected when we deal with discrete random variables. Consider a binomial random variable for the number of times a “two” appears on six rolls of a die. The probabilities are .33490, .40188, .20094, .05358, .00804, .00064, and .00002 for 0,1,2,3,4,5,6, “twos” respectively. The mean, median, and modal number of “twos” are exactly 1.00000; but the skewness is .730297 (using 4a,4b, 4c, and 4f). Given the equality of the mean, median, and mode, we might expect skewness to be zero. Said differently, given that skewness is positive, we might expect the mean to exceed the median and the median to exceed the mode. However, although this random variable is highly positively skewed, its mean, median and mode are all equal to each other.

  15. The bootstrap procedure begins with our estimates of transition and mortality probabilities and the exact sample sizes used to generate transition probabilities from our CPS samples and a conservative sample size of 10,000 for mortality probabilities. (10,000 must be a conservative estimate of sample size for mortality probabilities at most ages since mortality probabilities are based on the size of the US population at various ages.) We generate a bootstrap sample of transition probabilities for each age of the same size as our CPS samples and a bootstrap sample of mortality probabilities for each age. We then compute bootstrap replicates of transition and mortality probabilities for each age and use these replicates to calculate estimated probability mass functions for actives and inactives and distributional characteristics as previously described. The foregoing procedure was repeated 100 times. The mean and standard deviation of worklife expectancy are reported in the last two columns on Tables 4–35. The bootstrap was applied to each table anew since each table is based on its own set of transition probabilities. See Skoog and Ciecka (2004) for a discussion of bootstrap estimates and empirical results based on 1997–98 data.

  16. Assume alx actives and ilx inactives at age x. Use the recursions and from age x+1 to age TA −1. Then, gives worklife expectancy at age x without regard to initial labor force state.

  17. Educational groups differ in Skoog and Ciecka (2001b), Krueger (2004), and the present study. However, the less-than-high-school group is substantially the same in all three papers (see Table 39 for comparisons). In addition, the Bachelor's-degree group used by Skoog and Ciecka and the present paper coincide and comparisons are presented in Table 40.

Appendix

Pooling Labor Force Participation Data: Trend Considerations

The primitive data are estimates of a year of CPS data for persons grouped by age, education, and sex, and denoted by or , where t refers to the year and x to age and other demographic characteristics of a group. In the regression analysis below, we will identify or . This analysis will ignore the business cycle and will contemplate trend models of the form or . To fix ideas, we focus on the equation for and articulate four approaches to deal with trend.

(1) No Trend – i.e., β2 = 0.

Action: Pool the data over the years indexed by t and average.

(2) Believe in a Trend and Take the Model Seriously

Action: Estimate obtaining from the data, t = 1,2, . . .,T. For the future, out-of-sample years T+1, T+2, etc., estimate the transition probabilities to be used by extrapolating the trend, where T+1=2011, T+2=2012, etc. Estimated transition probabilities in the future are as follows:

Notice that the estimated model now will assume a cohort structure, and clarity would be improved if the β̂1, β̂2 reflected (the already implicit age) x, but also the ending year T of the sample used in its estimation. Doing so results in the notation β̂1;x;T, β̂2;x;t. Rewriting the previous equations, but now reflecting the fact that an x year old becomes x+1 a year later, we have:

Since the current x year old whose worklife expectancy we are estimating will be x+1 in T+1, and becomes x+2 in T+2, etc., we go down the main diagonal in the equations immediately above to secure the relevant transition probabilities. Notice that the transition probabilities for an x+1 year old will now depend on what year the person becomes x+1, as the elements in the second column show.

Similarly, we should use the model to generate, for periods before T, the transition probabilities which will again vary with the year a person was born. Similarly, we must extrapolate backwards in time/age for ages before the sampling starts (in cases of children or when an accident happened long ago). For these reasons, the model induces a cohort table, rather than the customary period table. We need a different worklife expectancy table for each cohort (birth year).

(3) Allow for a Trend, But Do Not Continue It Into the Future. Do Not Extend Trend Backwards.

Action: Use for all times t (ignoring the extra subscripting on the betas).

Not extending the trend further has some reasonable justification—various government sources indicate that there is no strong reason to continue the trend. It is more difficult to argue, if we have, say, a current 40-year-old injured in 2005 when he was 35, we should not use β̂1 +β̂2 (T–5) instead of β̂1 +β̂2T as suggested above. Doing so again causes us to compute cohort tables, since a 35-year-old injured five years ago will have different transition estimates than one injured today.

(4) Allow for a Trend, Do Not Continue It Into the Future. Extend Trend Back Through the Sample But Do Not Continue It Earlier Than the Beginning of the Sample Period

Action: This meets the logical objection of (3) but at the cost again of cohort tables.

We now consider the econometrics of trend-fitting. Trend estimation would meet long-run forecasting head-on, but it would be controversial, complicated, likely speculative, and additionally it would run into the question: “How can you project labor force participation when no government agencies can do so?”

Then and yt1 + β2t + ut.

Then and

We need det and then can compute

The estimated value ŷT of yT is

Collecting the coefficients of and , (A1) becomes

In our applications, yt will be , t= 2005,. . . ,2009 or , t = 2005, . . .,2009 (estimates of ), using outgoing rotation weights); and so we will, in the simplest detrending model, combine the individual years' transition probabilities by forming the

Method 1 Estimator: for .

Notice that for the years 2005–2009 we would have four data points ; they are replaced by a linear combination of the two sufficient statistics and , and the linear combination coefficients and which are the same for all ages x. This makes trend correction easy since we do not need to compute and . In fact, the estimator is ; and the wt weights may be verified to sum to 1, have the smallest value , and increase linearly by per period to .

To explain in more detail: we use all of the data to estimate the coefficients β̂1, β̂2 and to “correct” or remove our best estimate of the random part of the error û1 in the last observed transition probability . These are the two ways in which we “use all the data” even though, at a glance, it might be thought that we are merely adjusting the last observation by ûT. In other words, instead of using the last observation we use its predicted value . As always, , so the residual ût =1 – β̂1)+ (β – β̂2)T + ut — i.e., the fitted disturbance is the actual disturbance plus measurement error, and E(ût) = E (ut) = 0.

We now offer a second and different interpretation. In the presence of a trend, we expect that the T adjusted means are all equal to each other, and so on average the observed values are independent and identically distributed, and their expectation is equal to . Consequently we estimate β2 by ordinary least squares as above, then form the sample counterpart of adjusted transition probabilities , and average them. This leads to the Method 2 Estimator for : and the following lemma.

Lemma. The Method 1 Estimator = The Method 2 Estimator.

Proof. The Method 2 estimator is equal to since . Substituting for β̂2 yields , the Method 1 Estimator.

We notice that if there were no trend in the population, so that β2 =0 and β̂ ≈ 0, the Method 2 Estimator would be very close to the simple average of the individual transition probabilities, the best linear unbiased estimator from the first line of the proof. We would, of course, use the best linear unbiased estimator and impose β2 = 0, if we knew it to be true. Now, if we do not know in advance that there is no trend and if there is some important trend, we want to adjust for it by using the most recent data point on the fitted trend line. Our Method 2 interpretation does precisely this—it guards against trend, but at the cost of a small loss of efficiency when no trend is present.

The Method 2 Estimator makes it clear that all of the observations are being used, since it is computed from the grand mean of all T of the means, , plus an adjustment which requires one degree of freedom. The term also shows that the expected bias is when there is trend, but the naïve estimator ignores it. Finally, when there is no trend, we estimate approximately zero by β̂2. Since , our estimator is unbiased but includes an extra component in its variance, , there-by displaying the loss of efficiency from not using the best linear unbiased estimator.

The bias term can be given another interpretation: there is no bias if we ignore trend but “key off” the midpoint of the sample period instead of the end. To see this, assume that T is odd (if T is even, there is no precise midpoint, but the argument applies to the average of the observations at T/2 and (T/2) 1).Then vis-a-vis the observation at the mid-sample time period (T1)/2, the Method 2 interpretation, following the previous steps but now centering at the midpoint, requires adjustments as follows:

The coefficient of β2 (or β̂2 in the estimate) in this sum is zero, so pooling the individual transition probabilities leads to an unbiased estimator of the trend-adjusted transition probability at the sample midpoint.

The previous argument may also be seen as a simple application of the Theil (1957) specification error analysis. Let us re-parameterize the trend model yt = β1 + β2t + β2t + ut as

The regressor matrix results in , with y the matrix of CPS-primitive data estimates as before.

Notice that x1 is orthogonal to x2. We have x1′x2 = 0 since . This is precisely the case where, in the Theil analysis, omitting a variable from a regression in which it belongs (here the variable is x2) will have no effect on the least squares estimate on the coefficient of the included variable. We know the least squares estimate of a constant term is just the average. Thus our estimate using the average of all of the transition probabilities is the best linear unbiased estimator of . If T is odd, this latter quantity is the transition probability at the unique midpoint of the sample, i.e., where t = (T + 1)/2 . If T is even, then the observation ½ of a period before the middle of the sample of(T + 1)/2 is , while the observation ½ of a period later is . Averaging these two sample points straddling the midpoint which occurs on a half-integer results in again, proving the result. With T=4, the orthogonality condition involved , while with T=5 the second vector would have been ; both sum to zero, and so are orthogonal to the vector of 1's.

The conclusion is that, in pooling a relatively small number of years (e.g., 4 or 5), the trend will likely be small in any event; but small or not, our pooling and ignoring the trend still produces unbiased estimates of what would be the trend-corrected transition probability at the mid-point of the sample. The “no change” assumption of mortality and transition probabilities in the new and previous worklife tables is, most precisely, an assumption about the sample generally, but more particularly about the midpoint of the sample.

Copyright: © 2011 National Association of Forensic Economics 2011
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Figure 1.
Figure 1.

Life Expectancy at Age Zero by Gender and Calendar Year


Figure 2.
Figure 2.

Participation Rates by Major Segments of Labor Force


Figure 3.
Figure 3.

Probability Mass Function for Active Men Age 35 with BA Degress


Contributor Notes

*Gary R. Skoog, Department of Economics, DePaul University, Chicago, and Legal Econometrics, Inc., Glenview, IL; James E. Ciecka, Department of Economics, DePaul University, Chicago; Kurt V. Krueger, Senior Economist, John Ward Economics, Prairie Village, KS. Supplemental data material is available here.

Authors wish to thank Edward Foster for several astute observations that improved this paper. Three referees provided valuable comments that enhanced readability and content. We also are grateful to NAFE session participants at the ASSA meeting in 2011 for their comments. We thank Nancy Eldredge for her excellent work as Production Editor for our paper.

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