Labor Force Participation Rate

Why Workers Dropped Out

Text reads: "The labor force participation rate formula: Labor force participation rate = employed + unemployed / civilian non-institutionalized population"

Image by Ellen Lindner © The Balance 2019

The labor force participation rate (LFPR) is the number of people seeking work or working, as a percentage of the total population. In September 2020, it was 61.4%.

The LFPR measures the amount of labor in an economy, one of the factors of production.

The other three factors of production are natural resources, capital, and entrepreneurship, according to economists.

LFPR Formula and Definitions

Here's how the labor force participation rate is calculated:

LFPR = Labor Force (Employed plus Unemployed) divided by Civilian Non-Institutionalized Population 

To calculate the formula correctly, you must first understand how the Bureau of Labor Statistics (BLS) defines "labor force," and other key terms. The BLS is the federal agency that creates the monthly Job Reports on the labor force and its participation rate.

Labor Force

Everyone classified as either employed or unemployed.

Employed

The civilian noninstitutional population ages 16+ who in the last week worked at least an hour or more as paid employees, or 15 hours or more as unpaid workers in a family-owned business or farm. Each worker is only counted once, even if they hold two or more jobs.

It includes those who had jobs or businesses but didn't work that week due to vacation, illness, strike, training, maternity or paternity leave, or another family or personal reason, whether paid time off or not.

Unemployed

Those aged 16+ available for work who've actively sought a job within the past four weeks—but aren't employed. People who've been laid off and are awaiting recall to a job are also counted as unemployed.

Contrary to popular belief, the monthly unemployment rate has nothing to do with the number of people who applied for or receive unemployment benefits. Instead, this figure is derived from a BLS survey.

Civilian Non-Institutional Population

This group includes anyone living in the U.S. who is 16 or older, excluding those not in the active-duty Armed Forces or residing in institutions (primarily nursing homes, prisons, jails, mental hospitals, and juvenile correctional facilities).

Current Rate

Once again, LFPR = Labor Force (Employed plus Unemployed) divided by Civilian Non-Institutionalized Population. Here's how to calculate the labor force participation rate for September 2020.

  Number (in millions) Percent
Population (P) 260.742  
Not in Labor Force 100.599  
Marginally attached     1.922  
Discouraged     0.581  
Labor Force (LF) 160.143 61.4% of Population
Employed 147.563 56.6% of Population
Unemployed   12.580   7.9% of Labor Force
U.S. Bureau of Labor Statistics

History

The U.S. labor force participation rate rose from 58.6% in January 1948 to a peak of 67.3% in January 2000. This dramatic increase was caused by a few four demographic trends. First, the big boom of babies born after World War II became old enough to enter the labor force. At the same time, a higher percentage of women sought careers. In the 1990s, more Hispanic workers entered the workforce.

After the 2000 peak, three recessions over the next 20 years caused many people to drop out of the labor, some permanently. The recessions coincided with the retirement of Baby Boomers and other demographic trends.

The 2001 recession lowered the LFPR to 65.9% in April 2004. It never returned to the 2001 peak. The 2008 financial crisis sent the participation rate down to 62.5% by October 2015. By November 2018, it had only risen to 62.9%.

The 2020 recessions sent the LFPR down to 60.2% in April 2020 as millions of people were laid off or furloughed. This was the lowest level since January 1973, when it was 60.0.

Below you can see the seasonally adjusted civilian labor force participation rate over the last two decades. It also shows the massive drop since the financial crisis and its slow recovery. It also shows the drop in April due to the pandemic.

Why is the LFPR Declining?

Many workers who left jobs never returned even once jobs became more available. Although it's too soon to say how many of these forces are at work in the 2020 recession, here are the four reasons why the participation rate will probably never return to its 2000 peak, according to research. These demographic changes were impacting the labor force even before the recession.

Boomers Leaving the Labor Force

According to the Federal Reserve Bank of Atlanta, half of the decline in labor force participation between 2007 and 2014 was due to the aging of America.

As baby boomers reach retirement age, they leave the labor force. Others stay home to care for ailing parents or spouses or claim disability. Baby boomers had a major impact on the labor force participation rate because they represent such a large percentage of the population, and why it may never regain its past levels, no matter how strong the job market is.

Men Ages 25 to 54 Leaving the Labor Force

A significant number of working-age men have also left the labor force. In 1954, 98% of men aged 25 to 54 were in the labor force. By 2017, that had fallen to 88%. This is one of the lowest rates of prime-age men in all developed countries. 

The drop-off is worse among men without a college degree. The percentage of people with at least a college degree rose from 33% in 1947 to 84% in 2000. With less demand for non-degreed men, the wages are much lower. Wages fell by 15% for these men between 1973 and 2016. Many manufacturing jobs that these men relied on have either been outsourced or replaced by technology.

"Discouraged workers," according to BLS, are those who reported giving up looking for work because they don't believe there are any jobs for them. Others became discouraged due to a lack of the right schooling or training, or because they worry that potential employers consider them too young or old. Some suffered discrimination. Discouraged workers aren't counted in the headline unemployment rate, but are counted in the real unemployment rate.

Jobs Leaving the Market

The Federal Reserve Bank of Kansas City found that between 1996 and 2016, there was declining demand for middle-skilled jobs, which involve easily automated routine tasks. Demand has increased for both low-skilled service jobs and high-skilled analytical or managerial positions, which are more difficult to automate.

Structural unemployment occurs when the skills of would-be workers no longer match what employers need. So despite improving job opportunities, some older workers were unable to return to the labor force.

Opioid Dependency

Almost half of the prime-age men not in the labor force take pain medication daily to treat chronic health conditions. Two-thirds of them are on prescription medication, including opioid medication. 

Yale professor Alan Krueger showed how opioids affected the LFPR. He estimates that from 1999 to 2015, 20% of the LFPR decline for these men was caused by opioid dependency. The National Institute on Drug Abuse reports that in 2017, 1.7 million Americans were addicted to opioids.

Poor Health and Disability

The Atlanta Fed found that Alabama, Louisiana, and Mississippi had especially low labor force participation rates. People in these states report they are too sick or disabled to work. Leading causes of U.S. death and disability include chronic diseases such as heart disease, cancer, and diabetes.

The Bottom Line

The labor force participation rate of the U.S. is far from stellar, as a measure of a country’s active workforce in terms of its population.

In this volatile economy, U.S. LFPR remains weak since its dramatic fall during the 2007 financial crisis. The depressed state of the participation rate points to five main reasons:

  • An aging population
  • Long-term unemployment, which increased the rate of structural unemployment
  • A significant decline in middle-skilled jobs that revolved around routines, when technology has taken over many of these jobs
  • Increased opioid dependency
  • More people are disabled with chronic illnesses such as diabetes and high blood pressure

The decline of labor participation among workers of prime age is of particular concern. This downward phenomenon in LFPR may threaten U.S. economic growth in the long run.

Article Sources

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