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December 19, 2013

Labor Force Participation Rates Revisited

In an earlier macroblog post, our colleague Julie Hotchkiss examined the decline in labor force participation from the onset of the Great Recession into early 2012, concluding that cyclical factors likely accounted for most of the drop. In this post, we examine how labor force participation has changed since the start of 2012 (and admittedly, we’re much less ambitious in our analysis than Julie). Motivating our analysis, in part, is the observation that much of the recent decline in the labor force participation rate (LFPR) is related to rising retirements (see the November 19 Research Rap by Shigeru Fujita). This is not surprising, as the percentage of individuals aged 65 and older in the population has been increasing sharply over the last half decade. That said, our approach indicates that the LFPR of prime-age workers (ages 25–54) continues to fall, and this is an important source of the overall decline in LFPR in the recent data. Such declines in LFPR in these age categories should be less related to retirement decisions, keeping on the table the possibility that a weak overall labor market remains a key drag on labor force participation.

A straightforward decomposition illustrates that the decline in LFPR among prime-age workers is a major contributor to the overall decline in LFPR. To see this, we separate the change in LFPR into three components: one that measures the change due to shifts in the LFPR within age groups—the within effect; one that measures changes due to population shifts across age groups—the between effect; and one that allows for correlation across the two effects—a covariance term. It works out the covariance term is always very close to zero, so we will omit discussion of that term here. The analysis breaks the data down into five age groups: 16–24, 25–34, 35–44, 45–54, and 55+.

The chart presents the decomposition from Q1 2012 to Q3 2013. Over this period, the overall LFPR declined by half a percentage point, from 63.8 percent to 63.3 percent. The blue areas represent the change due to within-age-group effects, and the green areas represent the change due to between-age-group effects. The sum of the bars is equal to the overall change in labor force participation.

Decomposition of Change in Labor Force Participation (Total Decline from Q1 2012 to Q3 2013 = 0.5)

Three key results emerge. First, increases in labor force participation for the youngest age group boosted overall labor force participation by 0.075 percentage points. Second, the growing population share of the 55+ age group reduced LFPRs over the period by 0.21 percentage points, accounting for roughly 40 percent of the overall decline. Third, labor force participation for prime-age workers continued to fall. The combined within effect for the prime-age individuals (25–34, 35–44, and 45–54) reduced the participation rate by 0.28 percentage points—or a little over half of the overall decline in labor force participation. Additional declines in labor force participation were associated with the reduction in population shares of prime age workers.

From an accounting standpoint, the analysis shows that the fall in the LFPR for prime-age workers is a main contributing factor to the recent decline in labor force participation. Indeed, the LFPR of prime-age workers fell from 81.6 to 81.0 from Q1 2012 to Q3 2013, with similar declines for both men and women. Given that prime-age workers make up more than half of the population, it is not surprising that the drop in the LFPR for these age groups accounts for a substantial fraction of the overall decline.

To put this in perspective, we present the same decomposition from Q1 2010 to Q4 2011, where the decline in the LFPR is 0.8 percentage point. While the magnitude of the overall change is different, the decomposition results are quite similar. The decline in participation rates for prime-age workers accounts for a little over 60 percent of the overall decline, with a substantial drag from the rise in the share of older workers (accounting for a third of the drop). In short, the changes in participation due to within and between effects over the first two years look quite similar to that of the second two years of the labor market recovery.

Decomposition of Change in Labor Force Participation (Total Decline from Q1 2010 to Q4 2011 = 0.8)

A corollary to this analysis is that these sources of decline in labor force participation have allowed the unemployment rate to decline more sharply than expected, given the moderate employment growth observed. We will not take a stand on whether these are “wrong” or “right” reasons for unemployment rate declines. Rather, we note that the patterns observed early in the recovery are still in place (more or less) in the recent data.

Photo of Timothy DunneBy Timothy Dunne, a research economist and policy adviser,

Photo of Ellie Terryand Ellie Terry, an economic policy analysis specialist, both in the research department of the Atlanta Fed


December 19, 2013 in Employment, Labor Markets, Unemployment | Permalink

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Comments

totally incomprehensible to me; I'm an avg college educated person interested in economics.
Just poorly written - sort of an embarrassment.

Posted by: ezra abrams | December 20, 2013 at 05:34 PM

Please supply the following numbers:

1) the number of persons in the labour force, year-end, 2007: The percent of persons of working age actually employed at year end 2007.

2) the number of persons currently in the labour force, (most recent data): The current percent of persons of working age actually employed (most recent data).

3) the current unemployment rate, calculated as if the work force were as grreat as it was year end 2007

Posted by: tom velk | December 21, 2013 at 01:49 PM

Eyeballing the graphs, I don't agree that the patterns are "still in place." I see the between-age groups for prime age being different. A statistical test? Perhaps supplying a link to the data?

Posted by: Frank de Libero | December 22, 2013 at 02:16 PM

Much shorter, if not as detailed, chart version -

Google "Employment to Population 25 to 54" and FRED

"Labor Force Participation" is a metric best suited for political manipulation due to the mushiness of its terms.

That is a feature, not a bug, in the eyes of political administrations.

But if you are interested in the truth, try to stick to more objectively determinable terms like "employed" and "population" and ignore vaporous concepts like "desire for work" or "looking for work".

Posted by: cas127 | December 26, 2013 at 11:54 PM

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