Labor Force Participation Rates

The labor force participation rate is the percentage of people in the civilian noninstitutionalized (not in prison or the military) population, aged 16 and older, who are either working or actively seeking work. This rate has been gradually decreasing since the early 2000s, but appears be leveling off around 62.5% (Graph 1). There are two possible explanations for this decline: either the labor force is shrinking due to poor government policy and/or the dwindling effects of the 2008 Recession, or the participation rate is simply growing more slowly than the population as a whole. Based on Graphs 2 and 3, it appears that the latter explanation is most likely.

According to Graph 2, the labor participation rate of people aged 25-54 is relatively constant at around 82%, while that of people aged 55 and up appears to hover around 40%. This indicates that, while there was a slight decline over time, these participation rates are mostly steady and do not decline enough to account for the large drop in overall civilian participation rate. However, as apparent by Graph 3, the population of people not in the labor force who are 65 years and over has grown rapidly in recent years. This trend is likely due to baby boomers, a significant portion of the population, leaving the work force and retiring. Thus, it is safe to assume that a large part of the decline in the civilian participation rate is due to the rapid decrease in baby boomers in the work force, which has been declining faster than the population has been growing. This conclusion is supported by a 2014 report by the Congressional Budget Office, which found that of the 3 percent drop in the labor force participation rate from 2007 to 2013, half (1.5%) of the percentage point drop is due to the aging of the population, while 1% of the drop is from temporary business cycle factors and only .5% is due to policy decisions. It is not hard to imagine this trend continuing into more recent years.

Further, it is likely that the main reason the labor force participation rate was so much higher before the early 2000s is that baby boomers made the population of working people under 65 much greater, so it more than counteracted the declining participation rate of people older than 65. Based on these conclusions, is it safe to assume that we will never reach such high labor force participation rates again unless there is another baby boom?

Graph 1.

Graph 2.

Graph 3.

9 comments to Labor Force Participation Rates

  • ghimirer17

    Labor force participation is a topic that has been discussed a lot in class due to baby boomers reaching retirement age. I’ve wondered what the large retirement rates could mean for the economy, so I appreciate seeing the graphs and numbers to back what we have read and discussed in class. What I found most interesting from observing these graphs is graph #3 where the category “not in labor force” keeps rising as time continues to go by and your question – if we will ever reach as high labor force participation rates again unless another baby boom happens – is a question that has come to my mind as well. More than just whether or not we will have high rates of labor force participation again, I wonder how policies, especially regarding the economy, will shift towards accommodating larger populations going into retirement than before.

  • dawejko

    I too, find this topic interesting. There will be many effects from the growing elderly population in America and labor force participation is just one of them. As the Baby Boomers are the highest earners in the history of America, the have a lot of cash. Seniors are becoming so influential in our economy that the Economist has referred to this phenomenon as the “Gray Boom”. As the Boomers reach retirement we will see many firms increasing marketing efforts targeting the elderly. There are many opportunities for investment in “Gray” related products such as retirement homes, medical devices, etc.

    Another possible effect that the Boomers will create is a decline in the percentage of Americans that live in houses. Boomers prefer houses much more than later generations who typically prefer apartments. As Boomers sell their homes and move on, we should see a gradual decline in the housing market alongside an increase in multifamily development rates.

    • Prefer houses? Or could afford houses? We can’t automatically assume that changes in behavior reflect changes in utility functions rather than changes in constraints (monthly income vs monthly ownership costs, which is not independent of choice of location).

  • wedmonds

    Going along with Dawejko’s comments, I think he is dead-on when considering the shift in demographics amidst the “Gray Boom.” One idea in particular, related to the increasing retirement rates found in Bloom and Lorsch’s essay, I found to be especially interesting. He briefly discusses the shift in educational needs with an aging population. As educational institutions invest more into technological training programs and secondary education programs aimed towards the elderly, it is possible that the productivity of the elderly will increase as well. This could delay the retirement of some of those 65 and older, which would counteract some of the downward pressure towards labor participation rates.

  • How effective is formal schooling at retraining workers? This is an important question on which there’s lots of research, though most of that focuses on younger workers – and if we can’t prepare your generation for jobs, retraining is likely to be at least as hard. Furthermore, there’s a present value consideration: getting younger people into jobs gives a good return on education expenditures, a long stream of earnings for the upfront cost. The net benefit falls very, very significantly if you spend money to help someone age 60 to retool, very few years to “earn back” the expenditure.

    • cohend17

      I agree that the need to “re-educate” decreases the present value of education. However, how prevalent are these measures being taken, and how likely is one to opt out of a college education in their twenties, simply because of the prospect that they might need to familiarize themselves with new technology, etc., at an advanced age? Additionally, would a high level of education not facilitate the process of acquiring new skills at an advanced age? Of course, considering whether seniors would actually want to re-educate and work as they grow older, as well as whether this would be an efficient investment, are entirely different questions. It doesn’t seem like this type of strategy could benefit output, but I’m not sure if I see how it could hurt output.

      • What is the “production function” of education? Does a college degree generally equip someone with skills that make them immediately useful to potential employers? Or does it (i) help people learn how to learn (on the job), (ii) provide a filter to help employers separate workers by giving information on intelligence and diligence, and (iii) provide a signal on the level of ambition? The latter two are very useful, but their value diminishes as more people pursue (or rather, complete) college degrees.

  • santanagarcesk17

    Echoing a lot of the points that have already been made here, I think that with increased lifespans and a graying population retirement as we know it won’t exist soon. As Baby Boomers continue to retire on schedule, they’re now potentially looking at 20-30 years of retirement. In order to make sure that our economy is ready for this shift in population more opportunities need to exist for the elderly in order that they can still be productive members of society. The job market is also evolving with our generation as mobility increases. Instead of holding the same job until retirement, millennials will experience an average of 3 career changes which means that there’s an increased focus on gaining skills even after school ends.

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