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posted on 24 November 2017

The Shrinking Labor Force Participation Rate

from the Philadelphia Fed

-- this post authored by Michael Dotsey, Shigeru Fujita and Leena Rudanko

More Americans are neither working nor looking for work. What is going on?

The labor force participation rate has been falling in this country for nearly two decades. For men of prime working age, it has been falling for more than half a century. And the fall has been particularly acute among black men. The decline in participation has also accelerated since the Great Recession, largely due to the start of retirement by baby boomers. Low participation is distinct from unemployment - looking for a job but not finding one - which has fallen sharply since the recession. It is also distinct from the lingering problem of underemployment - settling for part-time or occasional work but wanting full-time work that matches one’s skills. Rather, a falling participation rate means more people are simply unable or unwilling to work at current wages.

The effects of nonparticipation on society are potentially severe: slower economic growth and a rising dependency ratio. The U.S. civilian labor force participation rate is the sum of all those who are either employed or officially considered unemployed divided by the total population over age 16. So a steadily shrinking participation rate means that the fraction of the population that is either gainfully employed or actively seeking work is steadily dwindling. This slows the growth of GDP, because fewer people are contributing to the nation’s output of goods and services. In addition, the economic returns generated by fewer workers must be spread more thinly via transfers through government programs such as Social Security and Medicare, or through family assistance or charity, to support the growing fraction of the population out of the labor force. As a result, a society with a lower participation rate is also burdened with higher tax rates because the government has a narrower tax base from which to draw revenue.

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