Explaining the Dropping Labor Force Participation Rate

The U.S. labor force statistics are showing significant changes, particularly in the size of the labor force.  As you will see in this posting, the causes behind this are much discussed and poorly understood.

Here is a graph from FRED showing us that the current labor force participation rate of 62.7 percent  is at decades-low levels:

Here is a graph showing that there are now a record number of Americans who are not in the labor force:

Since the end of the Great Recession, the number of Americans who are not in the labor force has grown by 12.237 million or 15.1 percent.  By definition, this means that at least some of the decline in the unemployment rate can be attributed to the shrinking of the U.S. labor force rather than an increase in job growth, largely because as unemployed workers fail to find jobs, they become discouraged and stop looking for work and join the ranks of the "not in the labor force".

In fact, this study by the Bureau of Labor Statistics suggests that the labor force participation rate will continue to fall out to 2022 to 61.6 percent:

Some studies have suggested that the dropping labor force participation rate is due to growth in the number of retiring American workers.  While this is an interesting viewpoint, the number of Americans aged 65 years and over who are still in the labor force has continued to grow as shown on this graph:

It certainly appears like older workers are bucking the trend of a smaller work force.  

Since the end of the Great Recession, the number of older participants in the labor force has grown by  2.434 million or 38.2 percent to its current level of 8.801 million.  In fact, as shown on this graph, Americans over the age of 65 now make up 5.6 percent of the total civilian labor force, the highest level since 2000:

Here is a graph showing the labor force participation rate for Americans 65 years and older going back to June 2008:

At 24.4 percent, the labor force participation rate for older Americans is higher than it was prior to the Great Recession.  It certainly appears like older workers are bucking the trend of dropping labor force participation rates, doesn't it.

It is even more interesting to see how labor force participation rates have doubled for American workers aged 80 and older since the early 1980s:

According to a study on CareerBuilders, in 2014, 53 percent of workers aged 60 and older say that they will work full- or part-time after they retire.  This is up from 45 percent in 2013.  The key reason for why senior Americans are choosing to work after the age of 60 is because of their personal finances; 78 percent say that they are unable to retire due to their household financial conditions and 60 percent say that they need the health care coverage that is provided by employers.  The Great Recession was particularly hard on older workers who have been forced to work to compensate for the negative shock to their wealth.

Obviously, demographic changes related to the number of retiring baby boomers do not explain all of the significant decline in the overall labor force participation rate.  One of the key reasons why there has been a drop in the size of the labor force is a result of declines in labor force entry rates.  This is particularly noticeable among young women.  A study by the Urban Institute shows that the percentage of women entering the labor force in 2010 - 2011 is lower for all age groups up to 66 years of age when compared to the entry levels back in 2002 - 2003.

Here is a table showing the labor force entry rates by age and gender for 2002 - 2003 and 2010 - 2011:

In comparison, the labor force entry rates for men drop significantly only for those aged 55 and older whereas entry rates drop significantly for women, particularly those aged 18 to 22.  The authors of the study suggest that the change in labor force entry rates may indicate that younger women were discouraged by the poor job market and ended up seeking further education while younger men continued to seek jobs.

Here is a graph from the Chicago Federal Reserve showing how the labor force participation gap (i.e. the gap between the projected work force participation rate and the actual workforce participation rate) is far higher for younger workers than it is for older workers since the Great Recession:

One of the other key factors in the dropping labor force participation rate has been educational level.  As shown on this graph, the labor force participation gap is far more negative for those Americans will less than a high school education particularly since 2007:

In conclusion, we can see that the dropping labor force participation rate is not related to an increase in the number of retirees since older workers are working more to compensate for the financial losses that they suffered during the Great Recession.  As well, increased longevity has led to older workers having to work longer to accumulate the wealth necessary to support lengthier retirements.  It appears that two of the more significant factors that have pushed the labor force participation down are the decline in the labor force entry rates by younger Americans and the decline in the ability of less-educated Americans to find employment in the post-Great Recession economy which has caused them to leave the workforce.  Some of this is due to the loss  of middle-skilled manufacturing jobs over the past two decades; it was these production jobs that provided life-long employment for millions of Americans who elected not to attain post-secondary education.