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January 17, 2014
What Accounts for the Decrease in the Labor Force Participation Rate?
Editor's note: Since this post was written, we have developed new tools for examining labor market trends. For a more detailed examination of factors affecting labor force participation rates, please visit our Labor Force Participation Dynamics web page, where you can create your own charts and download data.
Despite the addition of only 74,000 jobs to the economy in December, the unemployment rate dropped significantly—from 7 percent to 6.7 percent. The decline came mostly from a decrease in the labor force.
Since the recession began, the labor force participation rate (LFPR) has dropped from 66 percent to 63 percent. Many people have left the labor force because they are discouraged from applying (U.S. Bureau of Labor Statistics data indicate that a little under 1 million people fall into this category). But the primary drivers appear to be an increase in the number of people who are either retired, disabled/ill, or in school.
Certainly, the aging of the population accounts for much of the increase in the retired and disabled/ill categories. Still, there has been a lot of movement over the past few years in the reasons people cite for not participating in the labor force within age groups. Knowing the reasons why people have left (or delayed entering) the labor force can help us understand how much of the decline will likely halt once the economy picks back up and how much is permanent. (For more on this topic, see here, here, and here.)
The chart below shows the distribution of reasons in the fourth quarter of 2013. (Of the people not in the labor force, 1.6 percent indicate they want a job and give a reason for not being in the labor force. They are categorized here as "want a job" only.) Young people are not in the labor force mostly because they are in school. Individuals 25 to 50 years old who are not in the labor force are mostly taking care of their family or house. After age 50, disability or illness becomes the primary reason people do not want to work—until around age 60, when retirement begins to dominate.
How has this distribution changed over the past seven years? For simplicity, I've grouped people by age to show changes over time in the reasons people give for not being in the labor force. However, you can also see an interactive version of the same data without age buckets—and download the data—here.
Of the 12.6 million increase in individuals not in the labor force, about 2.3 million come from people ages 16 to 24, and of that subset, about 1.9 million can be attributed to an increase in school attendance (see the chart below). In particular, young people aged 19 to 24 are more likely to be in school now than before the recession. Among college-age people, those absent from the labor force because they are in school rose from 57 percent to 60 percent. Among people of high school age, the share not in the labor force because they are in school rose from 87 percent to 88 percent.
The number of middle-aged workers not in the labor force rose by 1.8 million (or 11 percent), with four main factors driving the increase.* "Wants a Job" increased 546,000 (34 percent). The "In School" category increased 438,000 (a 38 percent rise). "Disability/Illness" rose 393,000 (an 8 percent rise), and 302,000 more people said they were retired (a 43 percent rise; see the chart below).
Among individuals aged 51 to 60, those not in the labor force increased by 1.6 million (or 16 percent). This increase came almost entirely from the number of people who are disabled or ill, which rose by 1.3 million (a 33 percent increase). Interestingly, the number of retired individuals actually fell by 305,000 between the fourth quarter of 2007 and the fourth quarter of 2010. Since then, the number of retired people within this age group has risen 183,000 but remains 122,000 lower than fourth-quarter 2007 levels. So it seems more people in this age group were delaying retirement instead of leaving early (see the chart below).
About 6.8 million of the 12.6 million increase in those not in the labor force came from the 61-and-over category. An additional 5.3 million (a 17 percent increase) are retired, and 1 million more (a 34 percent increase) are not in the labor force because they are disabled or ill. The other categories were little changed (see the chart below).
In total, the number of people not in the labor force rose by 12.6 million (16 percent) from the fourth quarter of 2007 to the fourth quarter of 2013. About 5.5 million more people (a 16 percent increase) are retired, 2.9 million (a 23 percent increase) are disabled or ill, and 2.5 million (a 19 percent increase) are in school. An additional 161,000 are taking care of their family or house, and an additional 99,000 are not in the labor force for other reasons. The fraction who say they want a job has risen the most (32 percent) but has contributed only 11 percent to the total change. The chart below shows the overall contributions by reason to the changes in labor force participation for all age groups since the onset of the recession.
What further changes can we anticipate? It's hard to say, as many moving parts are at play. Most people currently in school will be approaching the labor market upon graduation. But increased college and graduate school enrollment could augur a permanent shift in the portion of the population who are in school instead of the labor force. We can also expect continued downward pressure on the LFPR from retiring baby boomers as well as boomers who exit the labor force because of disability or illness.
Last, the portion of people who want a job has increased the most since the recession began, and is currently 1.4 million above its prerecession level. People in this category tend to have greater labor force attachment, making them more likely to shift into the labor force. In fact, the number of people in this category has already started to decrease—and is down 709,000 from the fourth quarter 2012.
My Atlanta Fed colleagues Julie Hotchkiss and Fernando Rios-Avila in their 2013 paper "Identifying Factors behind the Decline in the U.S. Labor Force Participation Rate," looked at a range of LFPR projections for 2015–17 based on different labor market assumptions. Depending on the future strength of the U.S. labor market, the projections are highly varying—ranging between a decline of 2.4 percentage points and an increase of 2 percentage points from the 2010–12 average of 64.1 percent. So far, more factors are pulling down the LFPR than pushing it up; the latest reading for December 2013 is already 1.3 percentage points below the 2010–12 average. At that pace, the Hotchkiss et al. lower-bound estimate will be reached before the end of 2014, unless the dynamics change as the economy further improves.
By Ellyn Terry, an economic policy analysis specialist in the research department of the Atlanta Fed
* I've chosen to break the "middle-age" grouping at age 50 instead of 54 because the probability of retiring has changed in different ways over the past few years for the 25- to 50-year-old group and the 51- to 60-year-old group. See the chart mentioned earlier for more detail.
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