What’s Behind Declining Labor Force Participation?

Since employment declined dramatically in 2008, there has been acute interest in the so-called labor force “participation rate.” When employment began climbing out of the Great Recession trough in 2010, that progress seemed to be sabotaged by troubling decreases in the rate.

Many questioned aloud why American workers were leaving the labor force. A cluster of recession-related explanations were proposed; paucity of jobs, low hourly wages, and too few hours of work.  More alarming suggestions included skills mismatched with available jobs or entitlement incomes that beat working for a living.  And, the relentless march of boomers into retirement was an obvious factor.

To put the issues into perspective, we must look at the numbers.  The US civilian non-institutional population is 245 million people (age 16 and over).  The civilian labor force is 155 million.  That means there are 90 million who do not participate in the labor force, leading to a participation rate or 63.2% (essentially 155 million divided by 245 million).

Of participants, 144 million are employed, and 11 million are unemployed. As well, there are 2.3 million who don’t actively look for work because they believe there is none suitable for them.  These “marginally attached” people are considered to be outside the labor force.

Of those working, 19 million work part-time for non-economic reasons, but 8 million are working part-time for economic reasons – that is, they would rather have full-time work, but have settled out of necessity for less. A surprising 6.8 million hold multiple jobs – full-time and or part-time.

People flow in and out of these categories each month. Unemployed workers can leave unemployed rolls, if they get a job; or they can abandon the workforce into non-participating status.  Those who were unemployed last month are joined by the freshly unemployed this month.  The triage into who is employed, non-participating, marginally attached, or still-unemployed repeats every month.  Since 2010, labor force participation has dropped from 66% of 153 million in 2007 down to 63% of 156 million in August 2014, or 2.7 million people.  This people are not being counted among the unemployed.

In September 2014, Federal Reserve Board affiliates released a study of labor force non-participation.  Their estimates assigned causes for the 3% point drop in participation based on factors such as aging, the business cycle, life expectancy, educational attainment, Social Security generosity, marriage and fertility rates. Aging explained half of the 3% point drop in participation, and discouragement due to severity of the recession explained another quarter of the 3% point drop.  All other factors explained the remaining quarter of the drop.

The dominant explanation, aging, is readily seen in the low participation rate among those 65 and older. Within the 65 and older population of 45 million, only 7.776 million are working and just 465 thousand are unemployed. That reveals a participation rate of 18% for “seniors”– far below the 63% participation rate for everyone over age 15.

The alarming explanations for dropping labor force participation don’t explain much of the changes. Boomer aging explains a lot and it is likely to push the rate down for many years.

Alan Daley is a retired businessman who writes for The American Consumer Institute Center for Citizen Research