A closer look at the declining labor force participation rate

I’m glad that some Americans are questioning the unemployment data each month. Sometimes it shows the unemployment rate dropping even though relatively few jobs — or none at all — are being added to the economy.

The unemployment rate is sometimes declining because fewer Americans are actually counted as part of the civilian, non-institutionalized labor force.

One reason is cyclical: obviously, some Americans have entirely given up looking for work because of the state of the current job market, almost 3 years after the recession ended. Some of those workers will return to the labor force as conditions improve, which paradoxically might make the unemployment rate go up as the economy adds more jobs. (That’s the scenario I’m expecting through the fall — I’ll be surprised if the unemployment rate declines further, for sure.)

But the declining labor force participation rate is also the result of long-term demographic trends that have been well-documented, in some cases for decades.

I’m using two graphs here from Calculated Risk’s great post The Declining Participation Rate, which is a must-read for anyone who really wants to get a handle on this issue. It includes 4 other fascinating graphs that I’m not using here.

Take a look at this:

Note that the y axis does not start at 0, so nothing is as dramatic as it might first appear.

But it’s still pretty dramatic.

What’s the main reason for the sharp rise in the participation rate in the late 20th century?

  • Women entering the work force in large numbers beginning about 1970. The participation rate among men ages 25-54, while still almost 89% in 2012, has been declining for 50 years.

Why has the participation rate been declining since 2000, and why is it projected to decline further?

  • An aging population (the oldest Boomers are now over 65).
  • A continued decline in the participation rate among men of prime working age.
  • A perceived flatlining of the participation rate among women of prime working age.
  • An increase in the number of young people going to college.
  • Perhaps other cultural factors that are difficult to pinpoint, document, or change.

We might see a small bit of upward pressure on the curve as the economy improves and there are definitely more older Americans working longer, but the long-term trend is down.

Here’s another graph from CR that illustrates some of these trends, especially the declining participation rate among 18-24 year olds. Keep in mind that the plateauing of the 25-54 rate is a combination of increasing participation by women and declining participation by men.

It’s interesting to note that older Americans have been staying in the work force longer — the only age group with an increasing rate in this century. As recently as 20 years ago, fewer than 1 in 3 Americans over 55 were in the labor force. Those were the days of not only reliable Social Security but also robust public and private sector pension plans.