The Labor Force Participation Rate and It Trajectory–Why It Matters

by June Zaccone, Assoc. Prof. of Economics (Emerita), Hofstra University and member, NJFAC Executive Committee. Special Report 5 June 2015

If the LFPR were at its pre-recession level, the unemployment rate in September 2013 would have been 10.2% instead of 7.2%. The participation rate and its changes can lead to misleading conclusions about trends in unemployment. [See also Is the Decline in the Labor Force Participation Rate During This Recession Permanent?] “Yes, the unemployment rate has fallen. But almost the entire reason it has fallen is the drop in the number of people in the labor force either working or actively looking. As Binyamin Appelbaum has noted,* the share of adult Americans with jobs is essentially unchanged over the last three years…..If the decline stemmed largely from an aging work force, it would be much less worrisome. But the initial wave of baby-boomer retirements plays only a small role** in the drop; the labor force participation rate has fallen almost as sharply for people aged 25 to 54 as it has for the overall adult population.”
‘The Great Shift’: Americans Not Working, D. Leonhardt, Economix, NY Times, 8/27/13 [The LFPR rate has not yet recovered: in April 2016 it was 62.8. jz, ed.]

The labor force participation rate [LFPR] is the number of people in the labor force as a percent of the civilian noninstitutional*** population. To be counted in the labor force requires that one be either working or looking for work. [This count does not distinguish between documented and undocumented workers.] For example, persons who want a job but are not looking because they do not expect to find one are not counted. As the Bureau of Labor Statistics [BLS] describes them:

Discouraged workers are a subset of persons marginally attached to the labor force. The marginally attached are those persons not in the labor force who want and are available for work, and who have looked for a job sometime in the prior 12 months, but were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey. Among the marginally attached, discouraged workers were not currently looking for work specifically because they believed no jobs were available for them or there were none for which they would qualify.

Obviously, the LFPR declines with recession, as more of the unemployed experience failure in their job search, stop looking, and are no longer counted. The unemployment rate is thereby reduced. As the recession ends, many of those who have dropped out may return, slowing the decline of the unemployment rate. [The LFPR reached a low of 62.4 in 9/15, but has since recovered slightly to 63.0 in 3/16. jz]

U.S. LABOR FORCE PARTICIPATION RATE 16 AND OVER, 1948-April 2016

Source: https://research.stlouisfed.org/fred2/series/CIVPART

WHAT AFFECTS THE LFPR?

Among the most important are whether women, both married and unmarried, expect and are expected to work, and whether they have access to jobs; immigration and ethnicity and the way they shape engagement in the labor market; educational standards and costs; the health and age structure of the population and what financial provisions are available for those who need or wish to retire; and how rapidly jobs are growing, with what skill requirements, and where, which determines incentive to enter for those who otherwise might be out of the labor force. Disability Insurance was added to Social Security in 1956, giving workers some possibility of financial support if they need to withdraw from the labor force.

WHAT HAS HAPPENED TO THE LABOR FORCE PARTICIPATION RATE SINCE 1950? Entrance of women; disappearance of many prime-age men; re-entry of those 55 and over; higher educational standards; youth participation;changes in Social Security; effects of recession.

The LFPR at rose rapidly in the late 1970’s as women entered the labor force. From 34% in 1950, women’s participation rate rose to 60% in 2000. Their numbers rose from 18 million in 1950 to 66 million in 2000, their share of the labor force rising from 30% to nearly 47% in that same period.

PRIME AGE MEN: A disturbing change has been the decline in the LFPR of prime-age men: from a near-universal condition, nearly 98% in September 1954, to the current level of 88.5% in July of 2013. It started sinking in the early 1960’s, but the slide accelerated in the 1970’s.It began at 96.0% in January 1970 and by December of 1979, was 94.3. Further declines in the 1980’s and 1990’s ended below 90% in December 2008, with the ongoing jobs recession. A share of this decline is a good sign, one that indicates that for some men, there is a financial possibility of withdrawing from the labor force before old age. However, this choice is unlikely for the majority of those who have withdrawn.

LABOR FORCE PARTICIPATION RATE of MEN 25-54 1/60-3/15 [88.7]

lfpM25-54

PEOPLE AGE 55 AND OVER For the work force 55 years and over, the LFPR is quite different. The LFPR of this group declimed from about 43% in the early 1950’s to a minimum of 29.4% in October 1992. Since then, it has been rising and continued to rise during the recession. Now [7/13] it reached 40.3. One explanation is this: “Perhaps older Americans are being forced to work more because they have not saved enough for their retirement. This lack of savings may be a result of the recent economic trends in America: stagnant wages, depleted retirement portfolios (from the 2008 financial crisis), and rising health care costs.” [http://bpr.berkeley.edu/2013/04/the-declining-labor-force-participation-rate-why-this-trend-should-be-taken-seriously/] The age at which workers are eligible for full Social Security benefits is rising and will affect the choices available especially to those 62 and over.

LFPR WORKERS 55 AND OVER to 4/16

https://njfac.org/wp-content/uploads/2015/08/lfpr55over.png

EDUCATION AND THE LFPR: It is unremarkable that LFP rises with level of education. Education is a usually a costly investment in a marketable skill, so most people who do so have a strong commitment to the albor market. Further, education and income rise together, and both are linked to better health, safer jobs, and jobs that can continue to be done as a worker ages.

Over the period from 1992 [for which data are available], those at the lowest educational level have had a generally rising LFPR, though the rate of all other educational levels fell. Immigrants were more likely than native-born Americans to have less than a high-school education–24.6% vs. 5.1% in 2012. And foreign-born with less than a high-school education were also far more likely to be in the labor force: in 2012, their rate was 59.9 compared to 36.7 for the native-born. The foreign-born with less than high-school are less likely to be eligible for Social Security and its Disability Insurance.

At least for the 2000-05 period, “the labor force participation rate for native-born youths declined, while the rate was up for foreign-born individuals 25 years and older with less than a high-school diploma.” Rates for college graduates were similar for the two groups.

LABOR FORCE PARTICIPATION RATE BY EDUCATION

lfp25-educ

YOUTH 16-24 AND ITS LABOR PARTICIPATION: The serious deterioration of the LFPR of young people dates from the recession of the early 2000’s and of course suffered further declines with the Great Recession. For those 20-24, it peaked in 1987, at nearly 80, pushed up by relatively good job availability and has been rather flat for the last few years, around 71. For younger workers, from a peak of 58 in 1978, it reached a low of 33 in early 2014 from which it has since barely recovered.  Of course some of these young people have been persuaded to stay in school. Their unemployment rate has been more than double the national rate, even worse for young minority workers, and it has serious consequences. “Research shows that workers who are unemployed as young adults earn lower wages for many years following their period of unemployment due to forgone work experience and missed opportunities to develop skills.”

LABOR FORCE PARTICIPATION AGE 16-19 and 20-24, 1960-1st Qtr /2016

 

EFFECT OF RECESSION: The recent recession has brought the LFPR from an historic peak of 67.3 in early 2000 to a low of 63.3 in March and April of 2013. It has since recovered but only slightly.The level of July 2013, 63.4, has not been this low for 35 years, since September and October of 1978. If the LFPR were at its pre-recession level [66.0 % in December 2007], the unemployment rate would now [July, 2013] be 11.0% instead of 7.4%. [See another adjusted unemployment rate below.****] The population has aged somewhat over these few years, so the LFPR would be expected to decline but only slightly.

Labor Force Participation Rate vs. Unemployment Rate

lfpr-unem

 

The recession has led to a decline in expected labor force growth.

lf-proj


*”For the Employment Rate, an Uptick,” Economix, NYTimes, 7/5/13

**Leonhardt, “The Age Equation in Employment Numbers,” Economix, NYTimes, 8/2/13

***Note that” noninstitutional” means that people in military service are not counted, nor are those in prison, “mental facilities, or homes for the aged.”

****”The Congressional Budget Office (CBO) estimates the current size of the ‘potential labor force’–the size the labor force would be if job opportunities were strong–at 159.2 million. The size of our current labor force is just 155.8 million. In other words, according to the CBO about 3.4 million workers are ‘missing’ from our workforce. Job growth is not yet strong enough to start drawing them in. It’s useful to note that if those workers were in the labor force looking for work, the unemployment rate would be 9.4 percent instead of 7.4 percent.” http://www.epi.org/publication/trends-jobs-numbers-due-weak-hiring/

All data for LFPR are seasonally adjusted.

My colleague, Helen Ginsburg, contributed helpful comments and suggestions, for which I am grateful.

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