Explaining the Changes in Labor Force Participation
There has been a considerable amount of research looking at these trends. Much of the work concludes that longer-term secular trends are responsible for the decline as opposed to temporary cyclical factors. One of the key drivers in the decline in the U.S. labor force participation rate is demographics. As mentioned above, a key trend in recent decades has been in the increase in the share of older workers (55 and older). Not surprisingly, this is due to the population getting older — specifically, the aging of the baby boomer generation. Given that the labor force participation rate of older workers is considerably lower, the increase lowers the overall participation rate. Researchers who have looked at this have found that this accounts for a sizeable portion of the overall decline.
Andreas Hornstein of the Richmond Fed, Marianna Kudlyak of the San Francisco Fed, and Annemarie Schweinert, formerly of the San Francisco Fed, constructed a hypothetical labor force participation rate by fixing the educational composition of the population and the participation rate of each group at their 2000 levels and using the actual age-gender population shares as weights. In a 2018 San Francisco Fed Economic Letter, they found that changes in age-gender composition of the population caused about three-fourths of the decline in the overall rate. Similarly, in a 2017 article in the Brookings Papers on Economic Activity, Alan Krueger of Princeton analyzed the participation rate using a similar methodology and found that the shift in population shares accounted for 65 percent of the decline in the participation rate between 1997 and 2017. Moreover, because the aging of the population is expected to continue, its downward effect on labor participation will most likely continue. In a 2017 article in Economic Insights, Michael Dotsey, Shigeru Fujita, and Leena Rudanko of the Philadelphia Fed projected that rising retirements will continue through the late 2020s, which would imply a roughly 4 percentage point decline in the participation rate over that period.
Other factors besides demographics are at work, however. The decline in the labor force participation rate among prime-age workers over the past two decades has been particularly pronounced for prime-age males, whose participation rate declined by 2.6 percentage points from 2000 to 2018. There have been a number of explanations put forth to explain this decline.
John Coglianese, a Ph.D. candidate at Harvard University, argued that a change in how men are attached to the labor market is a factor. In his paper "The Rise of In-and-Outs: Declining Labor Force Participation of Prime Age Men," he found that one-third of the decline in the labor force participation rate of prime-age males is due to an increase in occasional short breaks between jobs. He argued that despite these breaks, these individuals are highly attached to the labor force and work typical jobs but are notable in that they take brief breaks outs of the labor force. He found that married or cohabitating men are taking more breaks and account for about half of the increase in "in-and-outs." He attributed this rise to a wealth effect from their partners' growing incomes. Young men increasingly living with their parents accounted for much of the rest of the increase.
An article by an economist at the Kansas City Fed, Diden Tuzemen, argued that a decline in the demand for middle-skill workers due to job polarization along with increased international trade and weakened unions accounted for most of the decline in participation among prime-age men. He looked at the increase in the nonparticipation rate (out of the labor force) for prime-age males by education level and noted while there is an increase across all education levels, the increase was largest for males with a high school degree and those with an associate's degree or some college (middle-skill workers). He also pointed out that at the same time that more middle-skill workers were not participating in the labor force, the share of employment by occupations with middle skills declined considerably over the past two decades, while the share of low-skilled and high-skilled occupations increased.
Research has looked at the impact of trade on employment and found that dislocations due to increased imports may have pushed down labor participation rates. In a 2016 article in the Journal of Labor Economics, "Import Competition and the Great U.S. Employment Sag of the 2000s," Daron Acemoglu and David Autor of MIT, Brendan Price of the University of California, Davis, David Dorn of the University of Zurich, and Gordon Hanson of the University of California, San Diego argued that slow employment growth between 2000 and 2007 was due to greater import competition from China. They estimated the direct and indirect impact of Chinese imports on U.S. manufacturing and found sizeable negative effects on employment — for industries directly exposed to import competition as well as indirectly for upstream industries. In theory, the employment lost to import competition would be expected to be reallocated to other industries, but they found no evidence that this occurred. They argued that the reallocation into nonexposed industries is overwhelmed by a negative adverse demand effect. Prime-age males comprise the majority of manufacturing employment, so as a result, the negative impact of trade could be a factor explaining the decline in participation by prime-age males.
Two other factors cited by research are the rise in disability and the opioid crisis. Dotsey, Fujita, and Rudanko noted that the decrease in the overall participation rate since 2000 has been due to roughly equal increases in the number of nonparticipants citing "in school," "retired," or "disabled." Krueger analyzed the effect of the opioid crisis by looking at survey data and opioid prescription rates to see if the sharp rise in prescription rates had an impact on labor markets. His results suggest a link between the opioid crisis and depressed labor force participation. Still, the effects of the opioid crisis remain difficult to isolate; it could be that poor labor market outcomes result in opioid usage in some instances, while opioid use drives poor labor market outcomes in others. Or it could be that some other factor is related to both. (See "The Opioid Epidemic, the Fifth District, and the Labor Force," Econ Focus, Second Quarter 2018.)
Fifth District Trends
We see similar trends within Fifth District labor markets. As in the national data, the labor force participation rate declined in each of the district jurisdictions from 1997 to 2017 — with the exception of the District of Columbia, where the rate increased sharply. The largest declines were in the Carolinas, where the participation rate dropped close to 7 percentage points; declines in other states were much less severe — 3.6 percentage points in Maryland, and 2.2 percentage points in Virginia and West Virginia. (See chart below.) The participation rate itself also varies considerably, from West Virginia's 53.3 percent to the District of Columbia's 70.4 percent.
The labor force is the number of people who are employed plus the unemployed who are looking for work. The labor pool does not include the jobless who aren't looking for work.
For example, stay-at-home moms, retirees, and students are not part of the labor force. Discouraged workers who would like a job but have given up looking are not in the labor force either. To be considered part of the labor force, you must be available, willing to work, and have looked for a job recently. The official unemployment rate measures the jobless who are still in the labor force.
The size of the labor force depends not only on the number of adults but also how likely they feel they can get a job. So, the labor pool shrinks during and after a recession. That's true even though the number of people who would like a full-time job if they could get it may stay the same. The real unemployment rate measures all the jobless, even if they're no longer in the labor force.
The U.S. Bureau of Labor Statistics measures the labor force. It provides the monthly employment report, which also provides the nation's current unemployment rate.
In 2019, there were 165 million people in the labor force. It was the fourth largest labor force in the world, after China, India, and the European Union. Over half, or 53.1 percent, were men and 46.9 percent were women.
The median age was 42.2 years old. The median tells you the point where half the people are older and half are younger. Of those, 5.1 million were teenagers between 16 and 19 years. Another 9.2 million were older than 65. The rest were in prime working years of 20 - 64 years old.
In 2016, healthcare was the biggest industry, employing 14 percent of the labor force — if you count both jobs in the healthcare sector and health-related jobs in other industries. Retail trade was next, putting 11 percent of the labor force to work. Manufacturing employed 11 percent, and education employed 9 percent. Technical and professional services employed 8 percent, while hotels employed 7 percent.
The labor force participation rate is the number of people who are available to work as a percentage of the total population. The rate increased between 1960 and 2000 as women entered the labor force. In January 2000, it reached a peak of 67.3 percent. The 2001 recession lowered it to 65.9 percent by April 2004. The 2008 financial crisis lowered it more to 62.3 percent by October 2015. By November 2018, it had only risen to 62.9 percent.
That drop should mean that the supply of workers is falling. Fewer workers should be able to negotiate for higher wages, but that didn't happen. Instead, income inequality increased as average income levels suffered. Workers couldn't compete when jobs were being outsourced. They also couldn't compete with robots. Businesses found it more cost-effective to replace capital equipment instead of hiring more workers.
Productivity is the amount of goods and services that the labor force creates. It's measured by how much is produced by a certain amount of labor and a fixed amount of capital. The more they create, the higher their productivity. Companies seek ways to boost productivity because it increases their profit. High productivity creates a competitive advantage. That's true for the individual worker, a company, or a country.
The BLS expects the labor force to increase by 8.4 million jobs from 2018 to 2028. Jobs that require a master’s degree will grow the fastest. Those that only need a high school diploma will grow the slowest.
The fastest growth will occur in healthcare and social assistance as the American population ages. The next most substantial increase will occur in private educational services.
Manufacturing jobs will decline as a result of both technology and outsourcing. Manufacturers constantly find more lower-cost ways to produce their goods. As a result, they are automating manufacturing processes. The jobs that remain will require training to manage the computers.
The U.S. labor force is facing more competitive labor from other countries that can pay its workers less. Countries like China and India have a lower standard of living. It's the main reason why American jobs are being outsourced.
The United States has a highly skilled and mobile labor force that responds quickly to changing business needs. Almost 30 percent of the labor force has at least some level of college or associate degree. Only 7.7 percent did not attain a high school diploma. That level of education is better than 25 years ago.
But U.S. investment in its human capital has slipped. For example, U.S. students' math skills have remained roughly stable since 2000. At the same time, those in other countries have improved. As a result, U.S. math test scores have fallen below the global average.
Labor mobility is much higher in the United States than in other developed countries. Americans are three times as likely as Europeans to move to find a better job. These mobile workers have greater flexibility to negotiate wages, change employers, and start businesses.
U.S. labor mobility is partly because the country was built through immigration. The country has 50.7 million immigrants, more than any other country. Most of them had the courage and flexibility needed to survive in a new country. That’s one reason Americans have historically been more willing to take risks.
Immigration means the U.S. labor force is more culturally diverse than in other countries. Diversity in the workforce brings fresh perspectives based on different experiences. It has created lots of innovation, especially in technology. That diversity helps make Silicon Valley the world's leading tech center.
The labor force participation rate is the portion of the population that is working or looking for work. It is calculated by dividing the total labor force (employed plus unemployed) by the total civilian non-institutionalized population. You would then multiply the result by 100 to express it as a percentage.
The working-age population consists of all the people in a country who are old enough to be part of the workforce. In the United States, that means adults over age 16. The labor force is a subset of that group that includes only those working or actively looking for work. The working-age population is a larger group, because it includes those who are old enough to work but do not, such as students, and those who are unemployed but not looking for work.