Money Matters - Oct. 3. 2016

Plummet in Workforce Participation Rate Disconcerting

How healthy is the jobs market in the United States? After peaking seven years ago at 10 percent in the aftermath of the Great Recession, the unemployment rate this August remained steady at 4.9 percent — near the post-recession lows and close to the level experienced during other periods of economic expansion. But a closer look at the jobs market — and definitions — suggests that improvement is needed.

For a more complete picture, a look at the “labor force participation rate” is required — a term defined as the number of people in the labor force divided by the entire civilian noninstitutional population age 16 years and over. “The labor force” only includes those who are either employed or unemployed. To be counted as unemployed, a person must meet three requirements: be jobless, be looking for a job and be available for work. If a person of working age is jobless but not looking for employment, he is neither counted as unemployed nor as part of the labor force.

In August, the labor force participation rate was just 63.8 percent. This rate has dropped 2.9 percentage points since the end of the Great Recession. In short, the percentage of working age people joining the labor force has declined even as a greater percentage of this shrinking pool are employed. As such, the drop in the unemployment rate is partially attributable to the fact that a growing number of working age people are simply not seeking employment.

Immediately prior to the start of the Great Recession in 2007, the unemployment rate was virtually the same as currently. Yet the labor force participation rate was 3.2 percentage points higher. The same percentage of a relatively larger labor pool was employed (see chart 1). At the beginning of the Great Recession 62.9 percent of the civilian population was employed. This ratio bottomed out at 58.3 percent in December 2009. But over the past 81 months, the percentage of the civilian population employed has only risen to 59.7 percent- less than a third of the way towards a full recovery on this indicator (see chart 2).

The demographics shift is only partially responsible for some of this decline in labor force participation. Senior citizens are less likely to be employed or to seek employment than their younger counterparts. But the Council of Economic Advisers estimated that an aging population accounted for only half of this recent decline.

Compared to the start of the Great Recession, the labor force participation rate for those 25–54 years old declined from 83.1 percent to 81.3 percent; meanwhile, the percentage of those 55 years + in the labor force increased from 38.9 percent to 40 percent (see chart 3). For young adults, participation in the labor force dropped precipitously from 74.1 percent to 70.9 percent this August. This continues nearly 30 years of decline, from a peak of 79.6 percent participation in 1987 (see chart 4). Only a portion of this decline, particularly with the youngest demographics, is attributable to pursuit of higher education.

Both the unemployment rate and labor force participation provide insight into the health of the economy. The drop off in the percentage of able-bodied, working age adults in the jobs market should give policymakers pause for concern. Fostering an environment hospitable to ingenuity and enterprise can increase the availability of opportunities and the incentive to pursue them.