Since the final quarter of 2007, the labor force participation rate has fallen from 65.9 percent to 62.8 percent in the second quarter of 2014, a decline of 3.1 percentage points. In this report, the Council of Economic Advisers estimates that this 3.1 percentage point decline can be attributed to three main sources:
About half of the decline (1.6 percentage point) is due to the aging of the population.
Because older individuals participate in the labor force at lower rates than younger workers, the aging of the population exerts downward pressure on the overall labor force participation rate. While older workers today are participating in the labor force at higher rates than older workers of previous generations, there is still a very large drop-off in participation when workers enter their early 60s.
About a sixth of the decline in the overall participation rate (0.5 percentage point) is a cyclical decline in line with historical patterns in previous recessions.
While the unemployment rate has come down from a peak of 10.0 percent in October 2009 to 6.1 percent in June 2014, it has remained elevated for the last several years. Historically, elevation in the unemployment rate is associated with a decline in labor force participation, as potential workers may decide to defer looking for a job until the economy improves. A portion of the most recent decline in the participation rate reflects this historical pattern, which this report refers to as the “cyclical” effect.
About a third of the decline (1.0 percentage point) arises from other factors, which may include trends that pre-date the Great Recession and consequences of the unique severity of the Great Recession.
In particular the two elements of this “residual” not explained by the standard factors are:
The fact that participation rates conditional on age were declining for many groups in the run-up to 2008, including for prime-age men from the 1950s and for prime-age women from the late 1990s, may also have contributed to the decline in participation. This would have been expected to result in a decline in the participation rate above and beyond the pure aging effect even in the absence of a recession. Note, these effects were partly offset by other pre-existing trends, like a rise in the participation rate for older workers.
The severity of the Great Recession, which has resulted in an unusual pattern of a very large share of long-term unemployed relative to total unemployment, may have lowered the participation rate more than would have been expected through normal channels. In fact, we find that a declining participation rate is historically correlated with the elevation of long-term unemployment, suggesting that both issues have a common cause or cause each other.
In the last few years the aging of the population has been an increasingly important source of the decline in the participation rate. From the beginning of 2011 to the second quarter of 2014, the participation rate fell by 1.4 percentage points. Around 70 percent of that decline (1.0 percentage point) can be directly attributed to the aging of the population and increased retirements.
Chosen excerpts by Job Market Monitor. Read the whole story at The Labor Force Participation Rate Since 2007: Causes And Policy Implications
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