Changes in Workforce Participation Composition Perplexing

There are many indicators of economic health, but perhaps none as perplexing to economists in recent years as the “labor force participation rate.” This rate measures the percentage of the available population which is either working or looking for work. The general purpose of the statistic is to answer the question, “of the people who could work, what percentage of them are in the workforce?” The definition of “available” has many conditions – one can’t be in prison nor the military, nor be on disability and must be above the age of 16.

For reasons not yet clear, the labor force participation rate has been experiencing a significant decline in recent years. The U.S. Bureau of Labor Statistics (BLS) estimates the overall participation rate has decreased from 66 percent in 2004 to only 62.9 percent in 2014; a change that amounts to nearly eight million people who opted out of work.

The reason this change is so confusing is because labor force participation has increased or stayed constant among several population groups who traditionally participate at lower rates.

Women have always had a lower participation rate than men, for reasons mostly related to family decisions, yet the participation rate for women has remained unchanged.

Retirement age individuals – 65 and older – traditionally participated at lower rates for the obvious reason of retirement, yet workforce participation in this group has increased. Oddly, the decrease in labor force participation seems to be entirely due to “prime” age males – aged 25 to 64 – which is precisely the demographic with the highest participation rate. The following graph demonstrates this unique dynamic.labor-participation

Since 1994, the labor force participation rate for prime age men has decreased from 92 to 88 percent. Younger men are working less too; the rate for men ages 16 to 24 dropped from 70 percent to 56 percent. The question, therefore, is why are so many men opting not to work?

There are two prevailing theories. Some argue participation is dropping due to the availability of government income sources and transfer payments, which according to department analysts,  do not appear to have a factual basis. The Current Population Survey (CPS) reveals the primary sources of income for different demographics. In 2014, the CPS showed for males not in the labor force, income from other family members, including parents, siblings and spouses, comprised well over two-thirds of household income. Furthermore, the percentage of non-working prime-age males who received government transfer payments has decreased significantly since 1994, from 45 percent to approximately 30 percent. Since government income has decreased along with labor force participation, there is little reason to believe that the availability of transfer payments has caused men to drop out of the labor force.

On the other hand, labor market factors may explain much of the falling participation rate. Participation has fallen most significantly among men with a high school degree or less. This suggests a correlation with the changing demand for low-skilled labor in America. As the economy shifts towards services and technology, the demand for unskilled labor has eroded, decreasing both the availability of jobs and wages paid. According to the BLS, in 1980 a high school graduate, on average, earned almost 80 percent as much as an equivalent worker with a bachelor’s degree; that ratio has recently declined to only 55 percent.

This trend has led many economists to suggest the decision to drop out of the labor force arises when workers find a mismatch between the jobs and wages they expect and what the labor market offers. This can also explain why participation has declined the most among men. Men with low educational attainment tend to work in manual industries like construction and manufacturing, while women with equivalent educational backgrounds are more likely to work in clerical and administrative support positions. These service positions, occupied in greater concentrations by women, have not experienced the same decline as male-dominated industries.

While the causes of declining participation are still in the realm of theory, and options to reverse the trend are even more theoretical, what is clear is the economy faces a long-term trend in labor force participation that cannot be explained with the rise and fall of the business cycle. Labor force participation has been in a state of steady decline for over two decades now, and as time has gone on it has become even more independent of recessions. New solutions will have to be charted, as it has become clear that the natural recovery of the business cycle is insufficient to put everyone back to work., regional economist
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