Labor Force Participation Rate

Yesterday there was a post about the participation rate that displayed a widespread misunderstanding of what the data actually shows.

The labor force and the participation rate have been falling since the great recession. The following table shows that for the last three years the participation rate and the labor force have been falling when long term population growth suggest that they should grow some 1% to 2% annually. In 2009 and 2010 employment actually fell, so essentially all of the fall in the unemployment rate from 10% in late 2009 to 9% in mid-2011 was due to the labor force contracting. During 2011 both employment and the labor force started growing, so that recent declines in the unemployment rate stemmed from both growing employment and a growing labor force. In January, the data was corrected to account for more recent census data that showed more rapid growth in the population and employment than had previously been estimated. But the historic data was not changed, so the January data represent a break in the data and is not exactly comparable to earlier data.

% %
2007 -0.1 1.13
2008 0 0.78
2009 -0.6 -0.09
2010 -0.7 -0.2
2011 -0.6 -0.17

But if you look at the data you can see that the participation rate actually started falling around the 1990 recession, so that the recent drops were just a more serious continuation of a trend that began some 20 years ago.

If you go back over a longer period you can see that the male participation rate has been falling from 86.6 in 1948 to 70.3 currently. The decline in the male participation has been more severe since the great recession but it is not a new trend. Much of the decline in male participation was the changing economy where the blue collar jobs that uneducated males traditionally filled have disappeared. Until the 1990 recession the drop in the male participation rate had been offset by a rising female participation rate. The recent drop in the female participation is due to both demographic factors — the baby boomers maturing — and the poor economy. Exactly how much is due to each factor is being debated.

The other way to look at the changing participation rate is to look at it by age brackets. Looked at this way there have been two major changed in the participation rate. One is the falling rate for teens and young adults. This has been falling since about 1980 and academic economist have been studying it for years. The overwhelming conclusion has been that it was due primarily to education, in that youths found the opportunity cost of working rather than improving their education and/or preparation for college was too high. Some would say it was the minimum wage, but I find their arguments unpersuasive. The other big change has been the rising participation of older — over 55 — workers. This more recent development and yet to received as much attention from economist. I suspect that a major factor behind the increased participation of seniors is the shift from defined benefit to defined contribution retirement packages. As a consequence more and more seniors have found they could not afford to retire as early as previous generations had.