Among the new employment figures the Labor Department released Friday morning is an obscure one that’s ripe for politicking: the labor force participation rate. It measures the percentage of the population age 16 and above who are actually working. The labor force participation rate fell last month to 63.6 percent, its lowest level since 1981.
In the midst of an economic recovery — albeit a slow one — why would the labor participation rate continue to be hover near four-decade lows?
If you take a long view of the figures, something becomes abundantly clear: there’s a lot more behind the country’s slumping labor force participation rate than today’s weak economy. The real reasons behind the fluctuations in the rate over the past several decades are fascinating, and they raise some of the biggest questions in the field of labor economics.
After climbing steadily for decades U.S. labor force participation plateaued about a decade ago, and began falling.
There’s no single, tidy explanation for what triggered the increase in the first place or why it’s come to an end, but the single clearest factor is that last century women began pouring into the work force — a phenomenon that came to an end in the last decade.
“The women who are going to enter have entered,” says Dean Baker, co-founder of the Center for Economic and Policy Research. All else being equal that explains why the labor force participation rate would flatten.
Other factors have combined to bring it down. The country’s aging population means we have an aging workforce — and that means a bigger-than-usual segment of the labor force is retiring in large numbers. Compounding that is the fact that large numbers of young working age men are not working. The Chicago Fed explored these trends in greater detail and concluded that the labor force participation rate will continue to decline well into the future.
As Justin Wolfers, an economist at the Wharton School of the University of Pennsylvania, pointed out, the macroeconomic implications are significant and could point to slow long-run GDP growth and the kinds of “jobless recoveries” that have marked the last two recessions.
“Applying this demographic view to recessions and recoveries suggests that the future recessions with historically typical cyclical behavior will have steeper declines and slower recoveries in output and employment,” conclude economists James Stock and Mark Watson (PDF).
If this is right, and current trends hold, our unemployment rate will remain high for a long time. That’s a scary thought, but as Wolfers noted, it depends on what’s underlying the trends. “If people are making other choices and are happy with those choices, it’s a great thing. But if women want to work and aren’t able to find jobs, it’s terrible.”
The data tell fascinating and important stories, but they aren’t the most telling indicators of the pace of the recovery. The U.S. has a much higher labor force participation rate than many other major economies, including some, like Germany, that weathered the global recession better than we have. The significance lies in broader demographic and policy differences between America and other countries.
“The differences with other countries are primarily women, young people, and old people,” Baker says. “We are pretty much in the middle of the pack in LFP for prime age men (25-55). We have higher rates of LFP for women than southern Europe, equal or lower than northern Europe (nordic countries are highest). For the young, we are very high. Students work in the U.S., they mostly don’t in Europe. This is conscious policy. They have stipend, we expect people to work. The same story applies to older workers. Most other countries have much more early retirement, people often can stop working in their late 50s. That is much rarer here.”
Photo from dramaj / Shutterstock.