Decline in the labor force participation rate

A short note from the St. Louis Fed suggests that much of the decline is anticipated demographic change and inevitably reversal of the extremely high participation rates in the early 2000s (A Closer Look at the Decline in the Labor Force Participation Rate)

The BLS-projected change in the aggregate LFP rate between 2010 and 2020 can be broken into two components: (1) the change in the age composition of the population, and (2) the change in the LFP rates of different age groups. We found that the change in the age composition of the population accounted for most (2.18 out of 2.20 percentage points) of the decline in the aggregate LFP rate over the period. Specifically, this 2.18-percentage-point contribution to the LFP rate decline was mostly driven by a 3-percentage-point decrease in the population share of those 45-54 years old. In contrast to the 2.18-percentage-point decline in the LFP rate that resulted from changes in the age composition of the population, the change in the aggregate LFP rate due to the changes in the LFP rates of different age groups is almost zero on net. It is important to note that this value is the result of dissimilar dynamics of individual groups rather than consistent behavior of the population. For example, the largest contributions to the increase in the aggregate LFP rate are posted by those 55-64 years old (0.63 percentage points) and 65-74 years old (0.65 percentage points). Yet the increases in the LFP rates of these older workers are almost completely nullified by the decreases in the LFP rates of those 16-19 years old (–0.55 percentage points) and 20-24 years old (–0.44 percentage points).

Elisabeth Jacobs at the Washington Center for Equitable Growth, attributes some of the decline to the stalling and reversal of women’s labor force participation, due to the U.S. not reforming labor market institutions to make them more family-friendly.  (Her prepared testimony is an excellent introduction to the issues.)

Women’s labor force participation was driving the overall upward trend in labor force participation through 2000, so the plateau and then decline in women’s participation in the ensuring years is an important factor for explaining the national trend. Understanding why women’s labor force participation has stalled is key to reversing the downward trends in the national rate. In 1990, the United States had the sixth-­‐highest female labor force participation rate amongst 22 high-­‐income OECD countries. By 2010, its rank had fallen to 17th. Why have other high-­‐income countries continued their climb while the United States has stalled? Research by economists Francine Blau and Lawrence Kahn suggests that the absence of family-­‐friendly policies such as paid parental leave in the United States is responsible for nearly a third of the U.S. decline relative to other OECD economies. As other developed countries have enacted and expanded family-­‐friendly policies, the United States remains the lone developed nation with no paid parental leave.

Jacobs, and others, note how important this issue is.  People who participate in the labor force- who have jobs- pay taxes.  The tax revenue funds lots of incredibly valuable public goods and social services.  Fixes to increase labor force participation are thus often very cost-effective from a public finance point of view.  Too often we neglect this perspective.  To take an obvious example: the United States’ comparatively huge incarceration rate takes out of the labor force hundreds of thousands of potential taxpayers, and adds a large cost (supporting those same prisoners).  How inefficient is that, especially when we know that a large fraction of those incarcerated are no significant danger to the public (minor drug and traffic offenses)?

Moreover, the other group whose participation is declining consists of some of the most marginal and vulnerable (to incarceration and addiction) members of our society. According to the Council of Economic Advisers:

Participation rates by educational attainment, previously quite similar, have diverged since the 1960s. In 1964, 98 percent of prime-age men with a college degree or more participated in the workforce, compared to 97 percent of men with a high school degree or less. In 2015, the rate for college-educated men had fallen slightly to 94 percent while the rate for men with a high school degree or less had plummeted to 83 percent.

So let’s ask our Presidential candidates what they hope to accomplish to increase labor force participation, and decide whether to support them based on their answers.

About mkevane

Economist at Santa Clara University and Director of Friends of African Village Libraries.
This entry was posted in Teaching macroeconomics. Bookmark the permalink.