Friday, February 27, 2015

Putting U.S. Labor Force Participation in Context

It's fairly well-known that US labor force participation--that is, the share of U.S. adults who are classified either employed or unemployed--has been dropping. But it's not always recognized how the U.S differs from other high-income economies in this trend, or how

The 2015 Economic Report of the President, released last week by the White House Council of Economic Advisers, offers some striking evidence on these points. The top figures shows labor force participation rates for "prime-age males," who fall into the 25-54 age category. The nice thing about looking at this group is that countries may differ considerably in their patterns of the extent to which students attend school into their early 20s, or the extent to which people retire in their late 50s and early 60s. Looking at the "prime-age" group leaves these ages out of the picture.

For men, the U.S. was middle-of-the-pack in labor force participation rates of prime-age males in 1990, and now vies with Italy for the lowest level. For women, the U.S. was near the top-of-the-pack prime-age labor force participation in 1990, but since then has been surpassed by France, Canada, Germany, and the United Kingdom, and is now about even with Japan--which has not been  historically known as a country with high labor force participation for women.

The Council of Economic Advisers sums up the cross-country patterns in this way:
Since the financial crisis, U.S. prime-age male participation has declined by about 2.5 percentage points, while the United Kingdom has seen a small uptick and most large European economies were generally stable. Of 24 OECD countries that reported prime-age male participation data between 1990 and 2013, the United States fell from 16th to 22nd. The story is somewhat similar among prime-age females. ...  In 1990, the United States ranked 7th out of 24 current OECD countries reporting prime-age female labor force participation, about 8 percentage points higher than the average of that sample. But since the late 1990s, women’s labor force participation plateaued and even started to drift down in the United States while continuing to rise in other high-income countries, as shown in Figure 1-10. As a result, in 2013 the United States ranked 19th out of those same 24 countries, falling 6 percentage points behind the United Kingdom and 3 percentage points below the sample average. 
These patterns of decline in US male and female labor force participation go back in time. The share of the male population above the age of 16 in the labor force has been falling for decades. The share of the female population above the age of 16 in the labor force rose steadily in the second half of the 20th century, but levelled out around 2000 and has been falling since.

When combining the cross-country data, the time series data, and the depth of the Great Recession, the report argues that the decline in labor force particpation rates in recent years is pretty well explaiued. The CEA writes:
Between 2007 and 2012 the decline in participation is fully (and at some points more than fully) explained by the aging of the population and standard business-cycle effects. Beginning in 2012, however, the labor force participation rate decline began to exceed what was predicted from aging and cyclical factors. Since late 2013, the labor force participation rate has stabilized and the portion of the decline that was unexplained shrank, albeit slowly, between the second and fourth quarters of 2014 ...

What explains the "residual" factor in the figure below? Part of it is probably due to a gradually lower rate of labor force participation within US age groups (like the evidence on prime-age workers given above), while another part is surely due to the fact that the Great Recession was so severe that it "led to a greater-than-normal cyclical relationship between unemployment and participation."

Whatever the reasons, as the U.S. economy looks ahead to the next few decades, figuring out ways so that the decline in labor force participation can be stabilized and reverse is an important goal of public policy.