A Closer Look, Academic Literature

Participation in the US – The decline

Ageing and the workforce

The largest single factor behind the decline is the ageing of the population. In order to understand how an ageing population affects overall labour force participation, it is helpful to look at the participation rates of different age groups. Figures 2 and 3 show the participation rate profiles for men and women over the course of their lives for various birth cohorts. For both men and women, participation rises throughout the 20s as individuals leave full-time schooling and enter the workforce, flattens out during prime working-age years, and then falls to low levels again as individuals enter their 60s and go into retirement.

Source (both Figures 2 and 3): Bureau of Labour Statistics; CEA calculations.

This very large drop-off in participation at older ages implies that, all else equal, the ageing US population will reduce the economy-wide participation rate. To estimate the impact of ageing, ignoring other changes in the labour market and economy, we hold constant the age-participation profile in 2007 and weigh it alternatively with age weights as of 2007Q4 and 2014Q2; the change in the participation rate is an estimate of the ageing effect on participation. The resulting estimated ageing effect is a decline of 1.7 percentage points, which is roughly half the decline in the participation rate since 2007Q4.

Standard business cycle effects

When the economy is booming, the labour force participation rate rises and often exceeds the predicted long-term trend, and during downturns the participation rate falls below trend, as nonparticipants become less likely to enter the labour force and the unemployed (who always exhibit a higher tendency to exit the labour force) become more numerous relative to the employed (Elsby et al. 2013). Figure 4 below shows this cyclicality in the participation rate by comparing it with the unemployment gap, defined as the difference between the actual unemployment rate and the natural unemployment rate, where both series are detrended using a low-frequency (biweight) time series filter. Although this time series trend estimation does not explicitly use any information about the age distribution of the population, the estimated trend contribution over the 2007Q4-present period turns out to be the same as the ageing trend estimated above — 1.7 percentage points.

Figure 4. Detrended participation rate and (inverted) unemployment gap

Source: Bureau of Labour Statistics; CEA calculations.

As is described in more detail in CEA (2014), we estimate the cyclical component by projecting the detrended labour over all participation rate on current and past values of the detrended unemployment gap, specified in first differences using a parsimonious lag specification involving the four-quarter difference of the unemployment gap. We estimate that between 2007Q4 and the present, business cycle effects alone explain 0.5 percentage points (about one sixth) of the total fall in the participation rate.

Chosen excerpts by Job Market Monitor. Read the whole story at The decline in labour force participation in the US | vox.

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