The Shrinking Labor Force

Since the Great Recession hit, the unemployment rate has gone down both nationally and in Wisconsin as jobs have been added. However, the labor force participation rate has not acted the way it usually does during an economic recovery. Rather than participation growing as discouraged workers reenter the job market, it has been shrinking nationally and in Wisconsin. That’s a problem.

The Civilian Labor Force is defined as the sum of civilian employment and civilian unemployment. The people counted are civilians (not members of the Armed Services) aged 16 years or older, who are not in institutions such as prisons, mental hospitals, or nursing homes. Among the people not counted are full-time students, retirees, stay-at-home spouses, and those who have given up looking for a job.

Here is a chart showing the reason people give for why they are not part of the work force, based on calculations by the Atlanta Federal Reserve using data from the US Bureau of Labor Statistics. At the bottom of the bar chart are people who would like a job but not actively looking—the so-called “discouraged workers” who may have concluded that no jobs are available so there’s no point in looking. These people are typically not included when computing the unemployment rate.

Reasons for not working across age groups

Shown in red are people who are ill or disabled. Their numbers peak just below age 60. One area of controversy is how much the growth of this population reflects weaknesses in the job market: could they do a job if one were available that was less physically demanding?

People who work part-time are counted as part of the work force. As a result the chart underestimates the number of students, stay-at-home parents, and retirees.

For the U.S. as a whole, the labor force participation rate peaked around the year 2000, well before the Great Recession, and has been declining ever since. That decline is tracked by the following chart from the St. Louis Fed based on projections from the Bureau of Labor Statistics (BLS). The BLS has had to repeatedly re-estimate its projections of future labor reports since 2002 because of the unanticipated decline in participation.

Labor Force Participation Rates: 1948-2050

Why is the labor force participation rate going down? A major cause is demographics. Even in 2002 the BLS expected the rate to start declining—but not as quickly as actually happened.

The following chart shows why a decline was expected. It shows the birth rate since 1910. The US birth rate hit bottom in the 1930s with the Great Depression. With post-war prosperity it peaked again in the 1950s only to hit a new low in the early 1970s. There was a slight uptick around 1990 (sometime attributed to the “baby boom echo”). Since then, the birth rate has resumed its decline.

U.S. Birth Rate

As the result much of the decline was anticipated, as the baby boom generation retired, to be replaced by smaller cohorts.

At least since 1948, when counts were first made, the participation rate of men has been continually declining, as shown in the next graph. Despite this, the overall participation rate increased during much of this period as more women entered the workforce. What’s notable about the decline in participation since 2000 is that it’s due much more to women leaving the labor force than any major change in the behavior of men.

Civilian Labor Force Participation Rate

The shift downward for women’s participation is not been seen in most other advanced economies, as illustrated in the next graph. This is somewhat surprising since the American economy has recovered better than others from the Great Recession. One possible explanation is the lack of a family leave policy in the U.S., making it harder for parents, especially women, to balance a job and child-raising, than in other advanced economies.

Labor Force Participation Rate of Women Aged 25-34, 1991-2013

The decline in the labor force participation rate has been particularly notable among younger Americans. By comparison, as the next graph shows, until recently the rate has been rising among those over age 55. As with many other economic indicators, possible causes could reflect either positive or negative trends. The decline in participation by those in their early twenties, for instance, could reflect a tougher job market, a desire for more education, or a combination of both.

Civilian Labor Force Participation Rate By Age

The increased participation rate among older workers is even more notable if only those 65 and older are measured. As the next chart shows it has been steadily rising since 2008 when the recession hit bottom. Again, possible explanations encompass the optimistic (increased health and vigor among older Americans) to the pessimistic (inadequate retirement funds).

Labor Force Participation Rate 65+

The next graph, from an analysis by the US Council of Economic Advisers (CEA), charts the decline in the labor force participation rate since 2009 that would be explained by demographics (“aging trends”) and the Great Recession (“cyclical effects”). It turns out that these two effects are sufficient to explain about two-thirds of the decline; the remaining third of the decline (called “residual”) is harder to explain.

Labor Force Participation Decomposition

The CEA also finds that American work force participation rates are lower than in most other advanced countries (members of the OECD) for both men and women. Again, this is surprising because the U.S. has recovered faster from the recession than most Europe countries. In addition, most European countries are challenged by a workforce older than that in the U.S.

Prime-Age Labor Force Participation

The CEA report makes four recommendations: immigration reform to address the aging workforce, adopting family-friendly workplace policies that make it easier for women to participate, aggressively pursuing steps to reverse the declining participation of men—particularly minority men, and addressing long-term unemployment.

If the labor force presents mysteries nationally, those mysteries deepen when Wisconsin is considered. Even though the rate of workforce participation has declined in the US, in raw numbers it has grown since the recession. The same is true of Wisconsin’s neighbor Minnesota, as shown on the next chart. Yet Wisconsin’s work force — the total number of civilian workers — has been essentially flat since 2010. Why didn’t the labor force increase with the recovery?

Civilian Labor Force (thousands)

As one would expect in an economic recovery, the number of discouraged workers has been steadily declining since the recession’s peak. In fact, the unemployment rate that includes discouraged workers, called “U4,” has dropped by 50 percent since 2010 in Wisconsin, Minnesota, and nationally. One possible explanation is outward migration–that people looking for jobs have found the grass greener in other states. Somewhat contradictorily, one hears numerous complaints from Wisconsin employers that they cannot find qualified employees.

Change in Labor Force Since Dec 2010

The behavior of the labor force size offers far more questions than answers, both in Wisconsin and the U.S. as a whole. Oddly, economists at the Wisconsin Department of Workforce Development seem unconcerned: they stopped issuing reports on this after 2013.

Here are a few possible partial explanations:

• The very success of the private economy in forcing down the cost of production of many goods has resulted in less need for employees in sectors like manufacturing.
• At the same time, increasing political opposition to government has meant that government hasn’t picked up the slack by, say, investing in infrastructure or other public services.
• Greater income inequality has held down total demand for goods and services. Low-income people who need those goods and services don’t have the funds to purchases them while there is a limit on what those on at the top of the income ladder can productively purchase.
• The needs-based qualifications for many transfer programs may discourage participation in the labor force, in effect placing a high marginal tax on working. For example, particularly in states that did not expand Medicaid, working at a low-pay job may result in the loss of health care. This may help explain why European countries have not seen the same decline in labor participation as the U.S. It could also help explain why people over 65 are the only group increasing participation in America; neither social security nor Medicare place a heavy tax on working.

All of which raises important questions. Unfortunately the search for real answers is likely to be lost in the effort to make political points.