The Great Recession was different – it caused a significant shift in the labor force participation rate. A Richmond Fed study looks into this phenomenon.
Excerpts from the study Where Have All the Workers Gone? (click on this link to read more)
… Prior to the recession, 66 percent of the population (not counting active duty military or people in a nursing home or in prison) over the age of 16 was in the labor force. Just four years later, this rate — known as the “labor force participation rate,” or LFPR — has fallen to 63.7 percent. While this might not sound like a large decline, it is unprecedented in the postwar era.
The dropoff is all the more striking because it does not include unemployed workers who are actively seeking work; such workers are still considered to be part of the labor force. It is only when the unemployed decide to stop looking for jobs, perhaps because they have given up on the possibility of finding one, that they are considered out of the labor force — although they might still want to work, and would accept jobs if they were offered. The current low labor force participation rate is the result of both long-term structural changes, such as an aging population and decreased demand for low-skill workers, and cyclical factors, namely the lingering effects of the 2007-09 recession. While it’s difficult to distinguish between the effects of demographics and the effects of the business cycle on labor force participation, why people drop out of the labor force — and what they do when they’re not working — has important implications for the future growth of the U.S. economy …
… the greater concern may be that the labor force is permanently smaller. In the long run, a country’s economic growth depends on the number of people working, and how productive those people are. All else equal, unless productivity grows very rapidly, lower labor force participation leads to a lower level of economic activity. That might be part of the explanation for the slow pace of the economic recovery …
…. Research has found that marginally attached and discouraged workers tend to be from demographic groups with higher unemployment rates than average, and are less likely than the unemployed to transition to employment. In addition, skill “mismatch” — the idea that the available workers do not possess the skills in demand by employers — could account for between 0.6 and 1.7 percentage points of the 5 percentage point rise in the unemployment rate, according to Sahin and Giorgio Topa of the New York Fed, Joseph Song of Columbia University, and Giovanni Violante of New York University. This suggests that mismatch could account for a significant portion of marginally attached and discouraged workers as well …
