Thursday, April 26, 2012

Falling Labor Force Participation

The percentage of the U.S. adult population that is either working or unemployed and looking for a job is called the labor force participation rate. From the early 1960s to the late 1990s, this percentage rose more-or-less steadily, from 59% to 67%. But since then, starting well before the Great Recession, the labor force participation rate has been falling. In my own Journal of Economic Perspectives, Chinhui Juhn and Simon Potter wrote about "Changes in Labor Force Participation inthe United States" back in the Summer 2006 issue.  Willem Van Zandweghe has a more recent take, with updated evidence, in "Interpreting the Recent Decline in Labor Force Participation" in the Economic Review of the Federal Reserve Bank of Kansas City.

Here's the pattern of the labor force participation rate. The first figure shows the overall number. The second figure shows the breakdown by gender: that is, the declining labor force participation rate for men, and the women's labor force participation rate that was rising until about 2000, but then flattened out and has now declined.

How much of the recent sharp decline in the labor force participation rate is the Great Recession, and how much is other factors? "At the turn of the 21st century, labor force participation in the United States reversed its decades-long increase and started trending lower. A more startling development has been the recent sharp decline in the labor force participation rate—from 66.0 percent in 2007 to 64.1 percent in 2011—a far bigger drop than in any previous four-year period. ... This article presents a variety of evidence—including data on demographic shifts, labor market flows, gender differences, and the effects of long-term unemployment—to disentangle the roles of the business cycle and trend factors in the recent drop in participation. Taken together, the evidence indicates that long-term trend factors account for  about half of the decline in labor force participation from 2007 to 2011, with cyclical factors accounting for the other half."

What are these long-term trend factors?

1) The baby boom generation (roughly those born starting in 1946 and up until about 1960) pushed up the labor force participation rate while they were moving through their prime earning years, and now are starting to pull down the labor force participation rate as they head into retirement.

2) Women entered the (paid) labor force in large numbers starting after World War II, which helped drive the overall labor force participation rate higher for decades. But the labor force participation rate for women seemed to top out at around 60%, and has flattened out since then.

3) Young adults in the 16-24 age group have become less likely to work. This group had a labor force participation rate of nearly 70% back in the 1970s and 1980s, but it has now fallen to about 55%. Part of the decline is that more young people are attending at least some college. Another part of the decline is that for many of the relatively low-skilled in this age group, the low wages they would earn don't seem worth taking a job.
4) The long-term trend of declining male labor force participation rates continues. What are these men doing when they leave the labor force? One doorway out of the labor force for many of them takes the form of applying for disability, which has nearly tripled in the last 10 years from 1 million to 3 million applications per year.  For a discussion of "Disability Insurance: One More Trust Fund Going Broke," see this post from August 11, 2011. 
 A long-term decline in the labor force participation rate isn't good news for long-term economic growth, nor for the long-term solvency of Social Security and Medicare. There are two particular areas worth focus.

1) Labor force participation is especially low for those with lower levels of education. For example, in 2010 the overall labor force participation rate was 66.5%. For those with less than a high school education, it was  46.3%; for those with a high school education but no college, it was 61.6%; for those with some college but less than a bachelor's degree it was 70.5%; and for college graduates the labor force participation rate was 76.7%. The wages of low-skill work in the U.S. economy are apparently scanty enough that they don't get people to work, at least when compared with the alternative of not working.

2) The labor force participation of the elderly has been rising since the mid-1990s, albeit slowly. For example, the labor force participation rate of the 55-64 age group rose from 59.3% in 2000 to 64.9% in 2010; for the over 65 group, the increase was from 12.9% in 2000 to 17.4% in 2010; and for the over-75 group, the rise was 5.3% in 2000 to 7.4% in 2010. As the population ages, we need to think about design of retirement programs and labor force institutions in a way that certainly doesn't penalize--and perhaps can even reward--the decision to work a few more years.