Urban Wire What should you make of the falling labor force participation rate?
Zachary J. McDade
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Thanks to Austin Nichols for contributing to this post.

The labor force participation rate has fallen steadily since 2009 to its lowest level since 1978. The participation decline is contributing to the falling unemployment rate, but is that a bad thing? A good thing? Neither?

In short, it’s not clearly good or bad. Participation in the labor force changes for many reasons and not all exits from the labor force are bad: retirement can be a good thing, continuing education can be a good thing. So what do we make of the recent decline?

First, it’s important to note that, historically, labor force participation for young people and old people is much lower than for 25- to 54-year-olds—often less than half as high.

Regardless of changing participation rates at any given age, then, if young or old people are making up a bigger and bigger share of the total population, then the overall rate will decline—without saying much at all about the current (short-term) state of the economy.

A rough way to deal with changing ages in the population and changing participation rates is to look just at 25- to 54-year-olds. They make up the bulk of the labor force, and their participation rate has been pretty stable over time but has been slowly declining since the late 1990s. With that in mind, the chart below makes three interesting points.

First, the post-recession rate for 25- to 54-year-olds remains much higher than the rate for all ages, and didn’t fall nearly as quickly as the overall rate. Most of the prime-age population is still highly engaged in the labor force, which is a good thing.

Second, the participation rate of 25- to 54-year-olds didn’t fall much at all during the recession. Though employment dropped abruptly as people lost jobs, most people remained engaged. It was during the recovery that participation fell (though not nearly as quickly as the overall rate), but the decline doesn’t seem far out of line with the overall trend since the late 1990s.

Third, a big difference between this recovery and the one after the 2001 recession is that current declines in labor force participation have much less to do with higher exits and more to do with slower entries among young workers, particularly young women. The likely explanation is that young people see a still-fragile labor market and choose to postpone looking for work by continuing their education or simply staying home longer.

Is that a good or bad thing? Again, it's unclear. Young people who delay looking for work will spend fewer years in the labor market, and will produce, earn, and save less. That might weaken the economy. On the other hand, staying in school, volunteering, or raising families represents an investment in human capital, future earnings and, in some cases, creativity and innovation. Overall, that might strengthen the economy.

As boomers are aging, the relative share of people over 54 is thus growing, and their much lower participation is driving down the overall participation rate. Again, that long-term trend has little to do with the recession.

To be clear: the labor market is still quite troubled. Eleven million people are jobless and many others are underemployed; four million are mired in the trap of long-term unemployment. What’s more, it’s undoubtedly the case that the recession permanently removed some people, in all age groups, from the labor force altogether.

But on the whole, much of the recent decline in participation likely has less to do with the last recession than with longer-term trends.

Follow Zach McDade on Twitter at @zmcdade

Research Areas Economic mobility and inequality
Tags Employment and income data Youth employment and training