THE US LABOR FORCE PARTICIPATION RATE SINCE 2007

The White House has released a new report titled 'The Labor Force Participation Rate Since 2007" which seeks to explain why the labor participation rate in the United States has fallen since the final quarter of 2007 from 65.9 percent to 62.8 percent in the second quarter of 2014.


"In 2008, the U.S. economy collided with two historic forces. The first force was the Great Recession, the most severe economic crisis in a generation. While the economy has recovered considerably over the last five years, there is little doubt that more work remains to address some of the challenges left in the wake of the Great Recession. The turmoil of 2008 inflicted tremendous pain on millions of families, overshadowing the fact that 2008 also marked a unique milestone in U.S. economic history. That year, the first baby boomers (those born in 1946) turned 62 and became eligible for Social Security early retirement benefits. This second force—the demographic inflection point stemming from the retirement of the baby boomers—was felt far less acutely than the Great Recession, but will continue to have a profound influence on the economy for years to come, well after the business cycle recovery from the Great Recession is considered complete.


In addition to these inflection points in 2008, a number of longer-term trends had been playing out in the U.S. labor force prior to 2008—and have continued since then. These include the nearly continuous decline in labor force participation rates for prime-age males (i.e., age 25-54) since the mid-1950s and the dramatic rise in labor force participation rates for prime-age females in the 1970s and 1980s followed by a stalling and slight trend decline after the late 1990s.


Summary of the Main Results


Since the final quarter of 2007, the labor force participation rate has fallen from 65.9 percent to 62.8 percent in the second quarter of 2014, a decline of 3.1 percentage points. In this report, the Council of Economic Advisers estimates that this 3.1 percentage point decline can be attributed to three main sources:


About half of the decline (1.6 percentage point) is due to the aging of the population.
Because older individuals participate in the labor force at lower rates than younger workers, the aging of the population exerts downward pressure on the overall labor force participation rate. While older workers today are participating in the labor force at higher rates than older workers of previous generations, there is still a very large drop-off in participation when workers enter their early 60s.


About a sixth of the decline in the overall participation rate (0.5 percentage point) is a cyclical decline in line with historical patterns in previous recessions.
While the unemployment rate has come down from a peak of 10.0 percent in October 2009 to 6.1 percent in June 2014, it has remained elevated for the last several years. Historically, elevation in the unemployment rate is associated with a decline in labor force participation, as potential workers may decide to defer looking for a job until the economy improves. A portion of the most recent decline in the participation rate reflects this historical pattern, which this report refers to as the “cyclical” effect.


About a third of the decline (1.0 percentage point) arises from other factors, which may include trends that pre-date the Great Recession and consequences of the unique severity of the Great Recession.
In particular the two elements of this “residual” not explained by the standard factors are:
  The fact that participation rates conditional on age were declining for many groups in the run-up to 2008, including for prime-age men from the 1950s and for prime-age women from the late 1990s, may also have contributed to the decline in participation. This would have been expected to result in a decline in the participation rate above and beyond the pure aging effect even in the absence of a recession. Note, these effects were partly offset by other pre-existing trends, like a rise in the participation rate for older workers.
  The severity of the Great Recession, which has resulted in an unusual pattern of a very large share of long-term unemployed relative to total unemployment, may have lowered the participation rate more than would have been expected through normal channels. In fact, we find that a declining participation rate is historically correlated with the elevation of long-term unemployment, suggesting that both issues have a common cause or cause each other."


The Obama Administration is proposing three steps to change the downward trend. 


"First, immigration reform would raise the size of the labor force as well as boost participation rates and could largely offset further declines in participation due to aging. Second, adopting family-friendly workplace policies can boost female labor force participation. For instance, many states are currently considering adopting paid leave policies, and evidence suggests that the availability of paid leave and other family-friendly policies could increase the participation of women by about 7 percentage points (Blau and Kahn, 2013). Third, the long-run decline in participation among men, especially minority men, is unsustainable, and the Obama Administration is aggressively pursuing policies aimed at stemming these declines. Finally, in the near-term, the recovery from the Great Recession remains incomplete, and steps to strengthen the economy and encourage best practices for hiring the long-term unemployed can still make a major difference."


A complete copy of the report can be found at http://www.whitehouse.gov/sites/default/files/docs/labor_force_participation_report.pdf

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