Labor Force Participation

In earlier videos, we looked at unemployment: when people want a job, but can't find one. But it's also important to look at the factors that determine whether people want a job.

Why are some people in the labor force while others are not? The labor force participation rate is defined as the labor force divided by the adult population -- in both cases, excluding people in prison and in the military. If we google "Labor force participation rate United States FRED," we'll find this graph from the St. Louis Federal Reserve. The labor force participation rate was about 59% in the 1950s. In other words, 59% of the adult population was in the labor force, either working or looking for a job. The participation rate then increased to 67% by 2000 before falling to 63% in 2015.

Why does the participation rate vary over time? One reason is changing demographics. Let's add to the data the male and female labor force participation rates. We can now see the changes in the total rate have been influenced by two quite different trends: a dramatic increase in the female rate -- the red line at the bottom -- and a smaller but steady decrease in the male participation rate -- in green at the top. In the 1950s, for example, most women were not in the labor force. Less than 40% of women worked. By the year 2000, most women were in the labor force. Female participation rates had reached 60%. Over this same period, male labor force participation rates have decreased from 86% to only 69%.

So, what's behind these changes? One force is big, structural changes in our economy over the past half-century. In particular, manufacturing has declined as a share of the economy, and services have increased. The decline in manufacturing has tended to reduce male participation rates. And the increase in services has tended to increase female participation rates.

Let's take a closer look. Manufacturers used to hire a lot of relatively low-skilled, low-education workers, most of whom were men. Technology, however, has made manufacturing much more productive. We actually manufacture more goods in the United States than ever before, but we do so using fewer workers. And the workers who are hired in manufacturing -- they're more likely to be highly educated software engineers than relatively low-skilled line workers. The decline in manufacturing jobs has hit low-skill, low-education, male workers pretty hard. And unlike the shift from agriculture to manufacturing, these workers haven't been able to find high-paying jobs in other sectors of the economy.

As a result, some of these types of workers have dropped out of the labor force. Women, on the other hand, have benefited from the shift to a service economy. Sectors that traditionally employed a lot of women, such as education and healthcare -- those sectors have grown. In addition, women more than men have increased their education levels. As these changes have worked themselves out, male and female labor force participation rates have become much more similar, although males are still about 12 percentage points more likely to be in the labor force than are females.

Another important demographic factor that can influence the labor force participation rate is the age distribution of the population. Both young and older adults are less likely to work than people of middle age. Young adults, for example, are often not working because they're in college, while older people have retired. If the fraction of the population that is young or old changes, then we can expect changes in the labor force participation rate.

We saw earlier, for example, that the participation rate has declined since 2000. Some people have suggested that this is because the economy is weaker than the unemployment rate would suggest. And as a result, many workers are simply dropping out of the labor force. There's probably some truth to this claim. But another reason is that Baby Boomers have been retiring in greater numbers -- and that alone would account for part of the decline in participation rates.

Let's return to data from the St. Louis Federal Reserve, and now graph the labor force participation rate since 1980 alongside the percentage of the adult population in their prime working years, ages 25 to 54. As you can see, these two measures move closely together. As one increases or decreases, so does the other. And that's not surprising. It means that as the percentage of the people in the population who are most likely to work -- as that percentage increases, so does the labor force participation rate. And similarly, for decreases. Since the share of the population which is most likely to work has been falling since around 1998, some of the decline in the labor force participation rate -- it was baked in. It was going to happen regardless of the state of the economy.

In fact, careful estimates suggest that at least half of the decline in recent labor force participation rates was predictable from demographics alone. Demographics alone, however, aren't the only determinant of labor force participation rates. You won't be surprised to learn that incentives are also important. We're going to turn to that next.