Since the late 1990s the labor force participation rate (LFPR) has fallen nearly 5%, from 67.3% in April 2000 to 62.5% in May 2024, according to Bureau of Labor Statistics data. LFPR reached its lowest level since 1973 during the COVID-19 pandemic, dipping down to 60.1% in April 2020 as many workers found themselves suddenly out of not only employment, but opportunity.
The prolonged decline in workforce participation has prompted many people to ask: what is behind this decline? What does the future hold? How does a lower LFPR affect our economy? What is a healthy LFPR? What can be done to achieve it? In this blog post, Fourth Economy surveys the research of topical experts to assess their opinions, and pressure tests these insights against our own analytical findings.
What are Experts Saying?
Researchers and experts look at a mixture of variables when assessing what trends are behind the country’s falling labor force participation rate. A commonly cited contributor is aging. As baby boomers, the largest percentage of the American population, retire from the workforce, LFPR drops. This opinion is held by leading economists at the US Census Bureau and Federal Reserve Bank of San Francisco. Specifically, COVID-19 expedited early retirement among many baby boomers, leading to a premature drop in LFPR.
Findings from the Federal Reserve Bank of St. Louis suggest that working-age women, specifically those without a college degree, also exited the workforce at a higher-than-expected rate due to COVID-19. This trend primarily relates to the caretaking responsibilities of this population. In some instances, women without a college degree stopped working to take care of children and sick relatives. Inversely, women with a college degree were more likely to join the workforce during the pandemic due to work-from-home possibilities. In general, the shortage of childcare facilities in the US is also cited as a reason for low workforce participation that affects parents in different ways depending on the age of the child. When a parent must take care of their children full-time, work is not an option.
Other common tropes surrounding LFPR are social decisions. Many, both truthful and not, blame declining LFPR on crime, drug abuse, and a general unwillingness to work – or laziness – among younger Americans. These claims come with varying levels of evidence. Economic data from the Federal Reserve Bank of Chicago does suggest that Americans experienced an overall decrease in their willingness to work during the COVID-19 pandemic due to shifting expectations, priorities, and economic stimuli. The recent rise in drug abuse is also a factor in declining LFPR, according to a 2022 study by the Federal Reserve Bank of Atlanta and National Bureau of Economic Research. There is little data to suggest that crime and incarceration affect LFPR with any significance.
Persons with a disability also help account for gaps in labor force participation. According to data from the Bureau of Labor Statistics, disabled persons are significantly less likely to work than those with no disability. However, 2023 data suggests that “the employment-population ratio for people with a disability in 2023 was the highest recorded ratio since comparable data were first collected in 2008,” suggesting an increase in workforce opportunities for disabled persons.
Fourth Economy’s Take
Let’s get some historical perspective. The current drop in labor force participation is still higher than the rates sustained during the post WWII boom years of the 1950s and 1960s when the rate averaged 59%. The LFPR rose dramatically in the late 1970s, peaking in the 1990s at 67% and has fallen ever since. So perhaps the alarm bells and hand wringing are premature. Increases in labor force participation are not always a good thing. For instance, declining wages may force multiple workers in a household into the labor market, but that is not necessarily a good thing. The question is what is a healthy rate of labor force participation?
Source: U.S. Bureau of Labor Statistics, Labor Force Participation Rate, retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/LNS11300001, June 12, 2024.
Don’t dismiss demographics. Long term demographic shifts have certainly played a role in shifting the LFPR and the inclusion of women in the workforce has helped to sustain the labor force. In the 1950s, the LFPR for women was half that of men and by the 2020s that gap had fallen to only 11 percentage points. So while there have been some pandemic impacts, the overall trend of falling male participation and rising female participation still holds true.
Source: U.S. Bureau of Labor Statistics, Labor Force Participation Rate, retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/LNS11300001, June 12, 2024.
Changing Industry Trends Shifts in the structure of the economy from manufacturing to services have played into this story as well. Employment in manufacturing peaked at 39% of non-farm employment in 1944 and has steadily fallen and stabilized around 8% of non-farm employment. Manufacturing still employs more than twice as many men as women and they have been heavily impacted by the decline in manufacturing jobs (QWI Explorer | Employment in Manufacturing by Sex, 1993Q2 - 2022Q2).
Source: U.S. Bureau of Labor Statistics, All Employees, Manufacturing | FRED.
We are getting older. Like many other advanced economies, the U.S. workforce is graying. While the population 25 to 54 has increased, the population 55 and older has grown much faster since the 2000 Census. People under 25 accounted for 46% of the population in 1960, but less than 32% in 2020.
Source: US population over time
Since the 1950s the labor force participation rate has grown 19 points for the core working age population (25-54) and nearly 5 points for workers aged 20-24. That is offset by a decline of 15 points in workers aged 16-19, but they are a small share of the population. Participation for workers 55 and older also declined by 5 points and they represent a growing share of the population. Lower participation from young people is not enough to significantly impact the LFPR. Rather, the participation rates of older adult workers is the more likely culprit for some of the recent decline.
Source: U.S. Bureau of Labor Statistics, Labor Force Participation Rate, retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/LNS11300001, June 12, 2024.
So What do We Do?
We need to adapt to the demographic shifts in the workforce and industries.
We need to recognize childcare as an economic issue not a women’s issue.
As our population continues to age, labor force participation is going to continue to be a problem, so we must find common ground on immigration.
Last, but not least, we need to develop a better understanding of what a healthy labor force participation rate should be.
Fourth Economy helps public and private clients representing communities, regions, and states better understand their economic data and trends. Interested in learning more about your area’s labor force participation rate and other key data points? Reach out to us at [email protected].