Why are more people leaving the labor force, and what are they doing?
Since September of last year, the unemployment rate in the United States has declined nearly a full percentage point, from 9 percent to 8.3 percent. On its face, this is an encouraging signal about the health of the labor market. But some of the change is due to a potentially troubling trend: a dramatic decline in the number of Americans who are part of the labor force. 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 Recent Decline in the Labor Force Participation Rate and Its Implications for Potential Labor Supply
Source: Stephanie Aaronson, Bruce Fallick, Andrew Figura, Jonathan Pingle, and William Wascher, Brookings Papers on Economic Activity, Vol. 37 no. 1, 2006
Time Use During Recessions
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The Increased Role of Flows Between Nonparticipation and Unemployment During the Great Recession and Recovery
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The Unemployment Gender Gap During the 2007 Recession
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Disentangling the Channels of the 2007-2009 Recession
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Interpreting the Recent Decline in Labor Force Participation
Source: Willem Van Zandweghe, Federal Reserve Bank of Kansas City Economic Review, Vol. 97 no. 1, First Quarter 2012