The proportion of Americans working (or looking for work) has fallen significantly and fairly rapidly over the past several years, with notable implications for the future.
The combination of slower population growth in the United States and lower labor force participation rates will make for slow expansion in the workforce down the road. In addition, larger numbers of non-working people dependent on a smaller proportion of workers will generate policy challenges.
The Bureau of Labor Statistics (BLS) tracks the labor force participation rate, which measures people who are either working or have looked for work in the past year. After increasing for more than 60 years, the participation rate peaked in the late 1990s at just over 67 percent. At the beginning of the Great Recession in 2007, it stood at 66 percent, and fell slightly by 2009 during the worst of the downturn in the business cycle. Even with job market improvement since the end of the recession, the labor force participation rate has continued to fall, dipping below 63 percent in 2014. The decline is projected to continue, and BLS predicts that by 2024, only 61 percent of Americans will be part of the labor force, with the proportion likely falling further beyond that time.
While the labor force participation rate and the unemployment rate are somewhat connected, they measure different aspects of working (or not). Unemployment as traditionally measured counts only people who are actively looking for work, and is largely driven by cyclical factors such as the health of the economy and whether businesses are hiring. Labor force participation, by contrast, deals more with underlying patterns such as demographics and social norms and choices. Certainly the health of the job market affects labor force participation (people drop out during downturns and re-enter during recoveries), but it’s only one factor among many.
The labor force participation rate of men peaked at the end of the 1940s and has long been declining, but the overall proportion of people working continued to rise as women joined the labor force in large numbers. However, the labor force participation rate of women peaked in 1999 at 60 percent and has now also begun to fall.
Another reason for the decline is the aging of the large generation of people born between 1946 and 1964 during the post-war “baby boom.” This generation has been a large share of the labor force, but is now aging beyond prime working years (defined by BLS as ages 25 to 54). In fact, the oldest boomers began to reach retirement age several years ago. Participation rates among people aged 55 and older are much lower than in the prime working age ranges, and as more of the baby boomers retire there will be additional downward pressure on overall participation rates.
The working patterns and choices of young people is also affecting the overall participation rate. BLS data indicate that the labor force participation rate of youths (ages 16 to 24) has fallen over the past several decades, especially since 2000. School is the most commonly cited reason among those choosing not to work.
These changes have either been expected for many years (aging of the baby boomers), the result of the end of a major social transition (women entering the workforce in large numbers), or partly a desirable shift (young people choosing to further their education). However, even among the group of people in the prime working age range of 25 to 54, which has the strongest attachment to the labor market, the labor force participation rate is falling. Between 2004 and 2014, the participation rate in this age group dropped by nearly two percentage points.
Declining labor force participation presents challenges for the future. For one thing, a growing economy needs a growing workforce. Also, as there are more non-working people depending on the productivity of others, it presents policy challenges. The economic dependency ratio measures the number of people not in the labor force per hundred of those who are. In 2014, the ratio was 103, meaning that for every 100 people in the labor force, 103 were not (including 42 who were under 16 years of age and 24 who were older than 65). By 2024, the dependency ratio is projected to top 108, largely due to expansion in the group aged 65 and older. As the dependency ratio rises, the pressure on those who are working (to increase productivity, generate taxes, and otherwise support a larger number of non-working people) will intensify.
Looking ahead, labor force participation is projected to fall even further. By 2024, the baby boom generation will be ages 60 to 78, and many will have retired. Youth will continue to need higher education to compete in the job market and are expected to continue to opt for school over work. These underlying patterns are not really subject to change. While there may be some room to entice more prime working aged people back into the labor force, dropping labor force participation is likely going to be a fact of life for the foreseeable future. It’s something we’re going to have to deal with as a society through incentives, technological advances, and other measures to enhance productivity, whether we like it or not.
