After increasing for nearly four decades, the rate of labor force participation for individuals at least 16 years old began to fall in the first decade of the 2000s, from a peak of 67.1 percent in 2000 to 66.0 percent at the start of the 2007–2009 recession. Between the start of the recession and 2014, however, the rate fell even further, by a little more than 3 percentage points, to 62.9 percent. Since 2014, the labor force participation rate has stabilized, remaining at 62.8 percent in 2017 but still well below its pre-recession value (see Figure 1).
This paper examines factors that drive changes in the labor force participation rate and explores whether the recent decline may continue. Specifically, CBO constructs a birth-year cohort model to estimate labor force participation rates by age-sex-education-race/ethnicity subgroups. CBO augments the model’s age- sex-education-race/ethnicity and birth-year cohort fixed effects with a measure of the business cycle and several observable structural determinants of labor force participation to measure how much variation in those rates is cyclical and how much is structural. CBO then aggregates the estimates of the group rates to construct an estimate of the aggregate labor force participation rate. The predicted structural portion yields an estimate of the potential labor force participation rate.
The results show that, despite no sustained increase in the observed labor force participation rate in recent years, there has been a significant cyclical increase in that rate. In 2014, the labor force participation rate was about 1.2 percentage points below its estimated potential rate—the largest that gap has been during or after the most recent recession. Since 2014, the labor force participation rate has recovered considerably relative to the potential rate, though slack in participation still remains. In 2017, the labor force participation rate was roughly 0.4 percentage points below its estimated potential rate, on average.
A relatively flat labor force participation rate in recent years represents cyclical strength in the current labor market because structural changes are placing significant downward pressure on the participation rate. By far the largest source of that downward pressure is the shifting age distribution of the population toward a greater proportion of workers in years beyond the prime working years. Specifically, the potential labor force participation rate began to decline in the middle to late 1990s, just as the first cohorts of the baby-boom generation began turning 50 years old. That decline averaged about 0.1 percentage point per year through 2010. Since 2011, when the first baby-boom cohort turned 65 and entered the traditional retirement years, the potential participation rate has declined by roughly one-quarter of one percentage point per year.
Chosen excerpts by Job Market Monitor. Read the whole story at CBO’s Projection of Labor Force Participation Rates: Working Paper 2018-04 | Congressional Budget Office