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Labor Force Participation Is Lower Than It Has Been In 30 Years -- Why It Matters And Why It Doesn't

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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.

About The Author

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Brian Beutler is TPM's senior congressional reporter. Since 2009, he's led coverage of health care reform, Wall Street reform, taxes, the GOP budget, the government shutdown fight and the debt limit fight. He can be reached at brian@talkingpointsmemo.com