Participation in US – Ongoing structural influences with some crowding out of job opportunities for young workers research finds

The evidence we present in this paper suggests that much of the steep decline in the labor force participation rate since 2007 owes to ongoing structural influences that are pushing down the participation rate rather than a pronounced cyclical weakness related to potential jobseekers’ discouragement about the weak state of the labor market – in many ways a similar message as was conveyed in the 2006 Brookings Paper. Most prominently, the ongoing aging of the baby-boom generation into ages with traditionally lower attachment to the labor force can, by itself, account for nearly half of the decline. In addition, estimates from our model, as well as the supplementary evidence on which we report, show persistent declines in participation rates for some specific age/sex categories that appear to have their roots in longer-run changes in the labor market that pre-date the financial crisis by a decade or more.

In particular, participation rates among youths have been declining since the mid-1990s, in part reflecting the higher returns to education documented extensively by other researchers, but also, we believe, some crowding out of job opportunities for young workers associated with the decline in middle-skill jobs and thus greater competition for the low-skilled jobs traditionally held by teenagers and young adults. Such “polarization” effects also appear to have weighed on the participation of less-educated prime-age men and, more recently, prime-age women. In contrast, increasing longevity and better health status, coupled with changes in social security rules and increased educational attainment, have contributed to an ongoing rise in the participation rates of older individuals, but these increases have not been large enough to provide much offset to the various downward influences on the aggregate participation rate.

That is not to say that all of the decline in labor force participation reflects structural influences. Our cohort-based model suggests that cyclical weakness was depressing the participation rate by about 1⁄4 percentage point in 2014:Q2, while evidence from cross-state regressions suggests that the contribution of cyclical weakness could be as much as 1 percentage point. The greater cyclicality evidenced in the cross-state regressions could be capturing some of the features of the current labor market we discussed outside the context of the model, such as the unusually high level of those out of the labor force who want a job, or any unusual cyclicality in youth participation or retirement.

Looking ahead, demographics will likely continue to play a prominent role in determining the future path of the aggregate labor force participation rate. The youngest members of the baby-boom generation are still in their early fifties, and thus the effects of population aging will continue to put downward pressure on the participation rate for some time. Indeed, on our estimates, the continued aging of the population alone will subtract 21⁄2 percentage points from the aggregate participation rate over the next ten years. And the overall downtrend could be even larger if some of the negative trends evident for particular age-sex groups persist.

Of course, considerable uncertainty attends these projections. While we can be reasonably sure that the domestic population will age according to Census projections, the future pace of immigration will undoubtedly influence the age distribution of the population, as immigrants are more likely to be in their prime working years than in their 50s or 60s. Moreover, future trends in participation for specific demographic groups are difficult to predict.

Our model has had little success in accurately capturing changes in teenage participation rates, and given the opposing effects of increased school enrolment and polarization, future changes in participation for currently younger cohorts seem especially uncertain. Similarly, while a further uptrend in the participation rates for older individuals seems likely, the pace of that uptrend is difficult to predict.

Moreover, our analysis does not account for general equilibrium feedbacks that may mitigate future declines in participation. For instance, as the downward trend in participation restrains the growth in the labor force, firms may react by increasing real wage rates or otherwise making work more attractive – say, by making work arrangements more flexible – partly offsetting the influence of aging and other factors.

In the end, however, we see further declines in the aggregate labor force participation rate as the most likely outcome. Further improvements in labor market conditions may stem that decline temporarily as discouraged workers are pulled back into the job market, and, indeed, it would not be surprising if the participation rate moved above its trend for a time. Over the longer-term, however, the downward influences on the aggregate labor force participation rate will likely dominate, restraining trend growth in the aggregate labor force and in the growth rate of GDP.

Finally, accepting our conclusion that the aggregate participation will likely decline further over the next decade, it is worth considering the potential implications of this development. The first-order effect, mentioned above, is that—holding trends in population growth (such as migration), average hours worked, and productivity fixed—the nearly 21⁄4 percentage point decline in the aggregate participation rate we project over the next decade will continue to hold down trend output growth by a little less than 1⁄2 percentage point per year through the end of the decade. Another implication is that, as the growth in the labor force slows, the “break-even” level of monthly job gains required to hold the unemployment rate unchanged month-to-month will be lower than decades past. By our calculations, over the next decade somewhere between 50,000 and 75,000 jobs per month will be needed to maintain an unchanged unemployment rate, well less than the amount needed in the 1990s). Of course, these calculations are greatly dependent on the general equilibrium concerns discussed above. More optimistically, for instance, as baby boomers continue to retire, job vacancies may rise in sufficient numbers to mitigate some of the secular downtrend in participation for younger adults and less-educated workers.