Labor Force Participation in US – About half of the decline is attributable to the weakness of the economy rather than changes in demographics

Between 2007 and 2015, the LFPR dropped 3.4 percentage points, equivalent to over 8 million people leaving the labor force. About half of this decline is attributable to the weakness of the economy rather than changes in demographics. Factoring in the rise in unemployment over this period, this translates into over 5 million fewer people with jobs as a result of the lingering effects of the downturn.

Given these estimates, if we consider that GDP per worker was around $120,000 in 2015, the loss of 5.2 million workers represents foregone output of $622 billion. However, due to an increase in involuntary part-time employment, even that is an understatement. If working hours returned to where they were in 2007, foregone output rises to $910 billion. There is a case to be made that these numbers are overstated given the nature of layoffs during the recession. Employers would not begin by firing their average-productivity workers, but rather their low-productivity workers; as such, we should expect that the foregone output of non-employed workers is less than $120,000 per year. However, even if we are overestimating the output gap by a factor of 1.5, foregone output still comes out to over $600 billion per year. This is a sign that we are operating well below capacity and that there are still major improvements to be made in today’s economy.

Chosen excerpts by Job Market Monitor. Read the whole story at  Declining Civilian Labor Force Participation: An Aging Population or a Weak Economy? | CEPR Blog | Blogs | Publications | The Center for Economic and Policy Research