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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.

March 28, 2006 in Labor Markets | Permalink


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Let me posit this argument to the author's argument - crap. The withdrawal of the teen from the labor force has to do with the price of CDs and the fact that minimum wage hasn't moved in years. Everything has increased in price from Big Macs to Movin' Pitchers yet a kid can't make enough money flipping burgers or slinging pizza dough to pay the freight. Recently I had the occassion to visit a number of fast food places (on a trip) and what did I find - mom and pop and grandma and grandpa working at these places. I suspect these folks are doing these jobs because they are the only work available any longer. They don't buy high priced CDs or even go to the movies anymore so the low rate minimum wage is just fine.

The authors of this study should really get out an about a bit.

Posted by: John | March 28, 2006 at 06:11 PM

I agree with the article. More and more teens are going to college. Increased enrollment at 4 and 2 year schools bear this fact out.

Teens also are busier and more scheduled than ever. This is a continuation of a trend when they were little. Most teens I know go from a spors practice to a music practice, then some type of activity to look good on their college ap, then home to do homework.

There was an editorial in today's Chicago Tribune attesting to this fact, written by a teen.

Being a teen is far different than it was even ten to twenty years ago. In my neighborhood, you never see kids outside playing, because they are at scheduled activities "playing". Kids barely know how to play baseball anymore with just a few guys. Graduate schools have noticed a difference as well. An article in the WSJ said full time graduate students are more demanding. A symptom of an overscheduled hyperkinetic childhood?

Most of the chain burger joints I know pay a little above minimum wage to attract better employees. They provide some benefits too.
It's not the greatest job in the world, but it is a job. Raising the minimum wage would increase unemployment. Study after study shows this.

Posted by: jeff | March 28, 2006 at 07:17 PM

"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..."

OK. This sounds very plausible, and in line with global trends. So the next port of call would be to keep an ongoing check on the evolution of fertility in the derived TFRs, and see if first birth postponenment is starting to gain any traction.

Posted by: Edward Hugh | March 29, 2006 at 03:54 AM

Raising the minimum wage would increase unemployment.

I guess that is why we are at record low unemployment in our country - because we don't have a minimum wage. Oh wait - we do have a minimum wage and look at all the jobs that were lost...Wait - more jobs were ... Gosh - an economists nightmare a theory that isn't supported by facts. Oh well - let's ignore the facts because the theory sounds so much better.

Posted by: john | March 29, 2006 at 03:54 AM

Incidentally, since increasing life expectancy and longer working lives ahead as pensionable ages adjust upwards mean that an initial investment in human capital now offers more of a return, the really worrying thing for the future of the US economy would be if participation rates among younger workers *weren't* turning down.

Posted by: Edward Hugh | March 29, 2006 at 03:57 AM

I can't believe that long-term trends like returns to education can account for the alarming decline in participation rates since 2000.
Did kids suddenly discover school in August 2001? For the five years before that, the labor participation rate averaged 44.4%. Since then, 37.6%. That represents a million fewer kids working now than in early 2001. Find me an extra million kids who are now in school and I'll fund your next research project.
The statistics on the number of students don't support that thesis at all. (The number of 18 and 19 year-olds in school actually declined from 2000 to 2003, although more 16s & 17s were enrolled.) Nor does the alternative explanation that the girls are all having babies hold any water. Yes, the long-term trend is toward lower participation rates. But there has got to be a cyclical component as well. These guys need to try harder!!

Posted by: fred c. dobbs | March 29, 2006 at 03:53 PM

Silly. Just correlate with illegal immigration- Johnny doesn't run the lawn service anymore- it is a team of Jose and Juan. Fast food ditto. Think aobut how the lowest rungs of the economic ladder are being filled by illegal immigrants and check out how adjusted for inflation wages for the bottom 20% of employed have drastically fallen.

Happy yet? The over busy teen is a symptom of a upper middle class household. Try looking outside the comfort zone to see some real economic damage.

Posted by: AllenM | March 29, 2006 at 04:15 PM

Dave, I'm completely operational and all my circuits are functioning perfectly...

"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..."

The good news, yes, kids are staying in school longer.

The bad news is, the above average employment growth attributed in the authors quote above to the Mc Jobs industries listed (excepting construction) is due to outsourced manufacturing jobs being replaced by McJobs and an increase of workforce adults being laid off from real jobs and having to take the McJobs offered to make ends meet. Welcome to the "new" economy.

Posted by: The Nattering Naybob | March 30, 2006 at 09:07 AM

The weak economy is mostly because of:

1. Comparison to an overheated bubble, dotcom economy.
2. Paying the cleanup of an overheated, bubble dotcom economy


There is also some worse performance becuase of security concern and the cost attached to them.

Posted by: TCO | March 31, 2006 at 06:58 AM

Participation rates were "above trend growth rates" during the late 1990's. Participation rates were at ALL TIME highs then.

Of course, since the 1970's, the overall trend had been upwards anyway, with women joining the workforce. But it had to start asymptotically slowing (not EVERYONE wants to participate). This slowing co-incided with the end of the exuberance, so it looks doubly bad.

But look at a 30 year graph of participation rates, it's pretty obvious. The late 90's were an aberration.

I'm left(ish) politically, but don't buy the doom and gloom anecdotes.

Posted by: luci | April 03, 2006 at 05:20 PM

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