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March 28, 2006
On Teen Labor Force Particpation, From The Chicago Fed
I and others have for some time now been taking notice the dramatic decline in labor force participation among the country's youngest workers, or more correctly, potential workers. (My most recent remarks can be found here and here.) Chicago Fed economists Daniel Aaronson, Kyung-Hong Park, and Daniel Sullivan take a closer look at the very youngest members of this group ---16 to 19 year olds -- in the most recent edition of the Bank's Economic perspectives:
... teens’ participation rates had been trending down since the late 1970s. However, from 2000 to 2003, teen LFP fell a stunning 7.5 percentage points, compared with a decline in the overall rate of only 0.6 percentage points. Currently, the LFP for teenage boys is the lowest since at least 1948 and for teenage girls is the lowest since the early 1970s...
Although it is clearly not uniform, the rate for every [racial, sex, and regional] subgroup reported in the table has fallen since the early 1980s, typically 2 percentage points to 20 percentage points for 16 year olds to 17 year olds and 1 percentage point to 17 percentage points for 18 year olds to 19 year olds. For nearly all groups, the majority of the cyclically adjusted decline in LFP has occurred just in the past five years...
The emphasis on trend might be the tip-off that the authors are not wholly convinced these low participation rates are a sign of an under-performing labor market:
... a drop in LFP could, under some circumstances, be a sign of some additional labor market slack. At least in the case of teenagers, we think that such an interpretation of current developments is hard to square with several facts.
First, the CPS asks whether those out of the labor force want a job, and in recent years there has not been a notable increase in the number of such teens...
A second difficulty with the weak demand explanation is apparent in the relative employment growth of the industries most likely to hire teens. If the sharp absolute and relative decline in their participation was primarily due to weak demand, we would expect to see that the industries that have traditionally hired teenagers had fallen on hard times, disproportionately impacting teenage work activity. However, we know of no evidence that traditional employers of young people have performed poorly recently. If anything, the top five industry employers of teenagers (in order: eating and drinking places, grocery stores, miscellaneous entertainment and services, construction, and department stores), accounting for almost half of all 16 year olds to 19 year olds employed in 1999, have together experienced employment growth well above the national average...
If the decline in teen LFP was primarily due to weak demand, one would expect their relative wages to have fallen. Over the ten-year period prior to 2002, that was clearly not the case...
However, since 2002, the real wage rates of teen workers, though still well above their levels in the late 1980s and 1990s, have fallen modestly... Declining real wages could also be consistent with some softening in the demand for teen labor in the last few years. However, given the lack of an increase in the rates at which teens report they want a job, it is unlikely to be the major factor in the decline in teen LFP.
So, what's the answer?
We suspect that teen LFP declines, particularly over the long run, are driven primarily by labor supply choices...
A massive literature has documented that the financial return to obtaining more education has increased significantly in recent decades... the return to having a college education began to rise substantially in the late 1970s, shortly before teen LFP began to decline...
To a significant extent, [teens] have also been increasing the time they devote to human capital investment. The increased value of education for their future earnings as apparently caused teens to increase their school enrollments and likely also the intensity with which they pursue their studies when enrolled. We know less about any possible changes in their leisure time. However, we have found some preliminary evidence that wealth effects from increased financial aid may have reduced their work effort as well.
In total, the Aaronson, Park, and Sullivan study reinforces my suspicions that there is much more to the "weak" labor market post-2001 than meets the Keynesian demand-is-in-the-tank-because-the-economy-is-crippled-by-bad-policy eye. Just as they reinforce my inclination to believe that those "weak" labor markets just might be a sign of better things to come:
The increases that we have noted in teen’s human capital investments... do suggest some reason for optimism for future levels of productivity.
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