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Labor Force Participation Decline Might Be A Telling Story

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The jobless rate is at historic lows and certainly is an important economic barometer.

But looking at the labor force participation rate might be a more telling story.

That rate, which calculates the number of people employed or unemployed looking for work as a percentage of the total adult working-age population, has been steadily falling since 2000.

And based on the latest participation rate data, one has to wonder where has all the labor gone?

The labor participation rate is important because it is a broader measure than the unemployment rate in identifying the workers available to produce goods and services in an economy. In other words, it points to the potential of all productive workers in a society.

In addition, because overall economic growth is driven by increases in productivity and the labor force, the labor force participation rate is a driver of long-term economic growth.
The labor force participation rate also can impact wages.

A low unemployment rate is historically associated with rising wages because a reduced supply of available workers causes firms to raise wages to attract qualified workers. If the unemployment rate is low and the participation rate is rising, however, then more people are coming into the labor force to apply for the job openings and this new supply of workers can hold back wage growth.

The labor participation rate rose from 58.6% in January 1948 to a peak of 67.3% in the first three months of 2000 as baby boomers and more women entered the labor force.
Higher education levels, which are associated with increased participation in the economy, also rose over this period.

The percentage of people 25 years and older who completed high school or college rose from 33.1% in 1947 to 84.1% in 2000, according to U.S. Census Bureau.
Since the peak in 2000, however, participation rates have generally decreased.

The pace of decline accelerated after the Great Recession and hit a 38-year low of 62.4% in September 2015.

The declining labor force participation rate contributed to the slow economic recovery and tepid growth since the Great Recession.

Labor force participation stabilized in 2016 and the rate now stands at 63%, according to the latest data from July.

With these lower participation rates, wage growth has only recently begun to accelerate.

Many researchers have considered the reason behind the decline in participation and point to demographics as the main reason driver.

Economist Alan Krueger found that 65% of the decrease in the labor participation rate from 1997 through 2017 was caused by an aging population, according to a 2017 article published in the Brookings Papers on Economic Activity.

Partially due to the continued aging of the population, the U.S. Bureau of Labor Statistics projects the labor force participation rate will decline further to 61% in 2026.
Low labor force participation implies that some of the labor resources in our economy are not being fully utilized. Those individuals could become productive members of the economy if the barriers they face are removed.

Participation rates vary across the country and the state.

When considering the prime-age labor force, 81.6% of the civilian population ages 25 through 54 were participating in the labor force in 2017, based on the American Community Survey estimates. During the same year, the participation rate was 83.2% in Virginia and 83.5% in the Richmond metro area.

The participation rate was slightly higher, at 86.8%, in Northern Virginia, presumably because of the higher education level of its population as well as the abundant opportunities.
In contrast, the participation rate of the prime-age labor force was 68.8% in Southside Virginia in 2017 and 69.7% in the southwestern part of the state where education levels are lower and job opportunities less plentiful.

This commentary originally appeared in the September 1 issue of The Richmond Times-Dispatch.
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