Labor Force Participation Dropping

Bringing People Off the Sidelines

Robert Spendlove, Zions Bank Economic and Public Policy Officer Jan 9, 2019

The U.S. economy continues to show strength and resilience. The current expansion has lasted more than nine years, which makes it the second longest in American history. Nearly all economic indicators are looking good. Employment growth is consistently strong, the unemployment rate is the lowest in decades, consumer and business confidence is very high, and equity markets continue to show strength. However, an interesting divergence in labor force participation could point to underlying weakness in the economy.

What Is Labor Force Participation?

Labor force participation is a technical term that makes normal people run away from economic discussions. However, it’s an extremely important indicator to analysts. The labor force participation rate is simply the share of the population that is working or looking for work. It is calculated by taking the country’s entire working age population and dividing it by the number of people who have a job or are looking for a job.

Changing Trends in Labor Force Participation

Throughout the past several decades, the labor force participation rate has changed dramatically. During most of the 1960s, labor participation was routinely below 60 percent. However, during the 1970s, 1980s and 1990s, the participation rate rose dramatically, as women entered the workforce in large numbers. This helped fuel America’s longest economic expansion during the 1990s. 

Labor force participation peaked in 2000 at 63.7 percent. Since then, participation rates have been decreasing. This is surprising given our current expansion and an economy with low unemployment leading to labor shortages and increasing wages. The current labor force participation rate matches levels from the late 1970s.

Causes of Low Participation

A major cause of the drop in labor participation is the huge impact of the Baby Boomer generation. Every day, 10,000 Baby Boomers in America reach retirement age and most leave the workforce. Demographers refer to this trend as the “silver tsunami” because of the huge impact these retiring workers have on the overall employment market. And because of dropping birth rates in the United States, there simply aren’t enough young workers to take the place of retirees.

Seeking Solutions

It is likely impossible to completely reverse the decrease in labor force participation and return to levels seen at the turn of the 21st century. However, there are a few things businesses and policymakers can do to encourage more people to come off the sidelines and re-enter the workforce. 

One way is to pay higher wages. For instance, before the latest recession, wage growth averaged 3.5 percent per year. But in the last decade wage growth has been extremely low and only recently started accelerating. 

Another way to encourage workers is to offer better nonwage benefits. These can include flexible or part-time work schedules, more family and personal leave, and opportunities to telecommute. Studies show that nonwage benefits are becoming an increasingly important tool in attracting and retaining workers.

A third solution is for policymakers to encourage more international migration into the United States. The American economy has hugely benefited from immigrants. Welcoming more workers from other countries will help backfill the loss of people in the existing labor force.

Ultimately, lower levels of labor force participation may be the new normal in America. Given major changes in demographics and overall workforce trends it might not be possible to return to the high levels seen two decades ago. However, in a dynamic and constantly adapting economy, it is imperative to encourage greater participation and welcome more people off the sidelines and into the workforce.

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