Labor Force Participation Rate and Why It Hasn't Improved Much
Five Reasons Why Workers Dropped Out and Won't Come Back
The labor force participation rate refers to the number of people available for work as a percentage of the total population. In February 2020, it was 63.4%.
It measures the amount of labor in an economy, one of the factors of production. The other three are natural resources, capital, and entrepreneurship.
Here's how to calculate the labor force participation rate:
LFPR = Labor Force / Civilian Non-Institutionalized Population where the Labor Force = Employed + Unemployed.
To calculate the formula correctly, you must first understand the underlying definitions outlined by the Bureau of Labor Statistics. The BLS is the federal agency that reports on the labor force and its participation rate every month in the Jobs Report. Here they are:
Civilian non-institutional population - Everyone living in the United States who is 16 or older minus inmates of institutions such as prisons, nursing homes, and mental hospitals and minus those on active duty in the Armed Forces.
Labor force - Everyone who is classified as either employed or unemployed.
Employed - Anyone aged 16+ in the civilian noninstitutional population who worked in the last week. They are those who worked an hour or more as paid employees or 15 hours or more as unpaid workers in a family-owned business or farm. It also includes those who had jobs or businesses, but didn't work that week because they were on vacation, sick, were on maternity or paternity leave, on strike, were in training, or had some other family or personal reasons why they didn't work. It doesn't matter whether it was paid time off or not. Each worker is only counted once, even if they hold two or more jobs. Volunteer work and work around the house do not count.
Unemployed - Those aged 16 or more who weren't employed, but are available for work and are actively looked for a job within the past four weeks. People who are only waiting to be recalled to a job from which they had been laid off are counted as unemployed, even if they didn't look for work. Contrary to popular belief, it 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. The BLS sets the definition of unemployment.
People who would like to work, but haven't actively looked for it in the last month are not counted as being in the labor force no matter how much they want a job. But they are counted in the population.
The BLS does keep track of them. It calls some of them "marginally attached to the labor force." These are people who have looked in the past year but just not in the previous month. They might have had school or family responsibilities, ill health, or transportation problems that prevented them from looking recently.
The BLS calls some of the marginally attached, "discouraged workers." These people have reported that they've given up looking for work because they don't believe there are any jobs for them. Others have become discouraged because they lack the right schooling or training. They worry that the potential employer thinks they are too young or too old. Some have suffered discrimination. They are counted in the real unemployment rate.
The other group that isn't included in the labor force comprises students, homemakers, retired people, and those under 16 who are working. Still, they are counted in the population.
Here's how to calculate the labor force participation rate for February 2020.
|Number (in millions)||Percent|
|Not in Labor Force||95.082|
|Labor Force (LF)||164.546||63.4% of Population|
|Employed||158.759||61.1% of Population|
|Unemployed||5.787||3.5% of Labor Force|
The labor force participation rate increased from 1948 until the late 1990s. From 1948 to 1968, the rate remained below 60%. But the rate slowly inched up as more women entered the labor force, breaking 60.4% in the early 1970s. It rose to 63.8% in the 1980s and reached a peak of 67.3% in January 2000.
The 2001 recession lowered the LFPR fell to 65.9% in April 2004. It didn't improve throughout the "jobless recovery." The 2008 financial crisis sent the participation rate to 62.5% by October 2015. By November 2018, it had only risen to 62.9%.
The supply of workers fell. As a result, these fewer workers should be able to negotiate for higher wages. But that didn't happen. Instead, income inequality increased as average income levels suffered. Workers couldn't compete when jobs were outsourced. They also couldn't compete with robots. Businesses found it more cost-effective to replace capital equipment instead of hiring more workers.
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.
Five Reasons the LFPR Fell and Might Not Get Up
It's unlikely the participation rate will ever return to its 2000 peak. Economists are divided on how much of the recent drop in the LFPR was due to the recession. Estimates range from 30% to 50% to as much as 90%. Even the most conservative estimate says that the recession forced almost a third of workers out of the labor force.
Many of those workers never returned even once jobs become more available. Here are the five reasons according to research:
Aging of America
According to the Federal Reserve Bank of Atlanta, half of the decline is due to the aging of America. These demographic changes affected the labor force even before the recession. As baby boomers reach retirement age, they leave the labor force. They don't need a job. Others stay home to care for ailing parents or spouses or claim disability themselves. Since they represent such a large percentage of the population, they have a major impact on the labor force participation rate. It's a big reason why it may never regain its past levels, no matter how strong the job market is.
Second, as of January 2019, 19.4% had been unemployed for 26 weeks or more. When the long-term unemployed spiked above 45% in September 2011, people were so frustrated that many dropped out of the labor force. Many lacked updated skills and employers weren't willing to take a chance with them.
Between the Ages of 25 and 54
Third, millions who left the labor force were between the ages of 25 and 54. That's prime earning years. Some were students who stayed in school longer. The Atlanta Fed estimated that this decrease in the labor force contributed a 0.5 point drop in the participation rate. Fewer of those students worked while they were in school. But anyone who wasn't employed during their prime earning years may never get a chance to recover their careers.
Men in that age group who lacked college degrees also dropped out. In 2017, only 75.3% of those men were employed. That's lower than the 90% of male college graduates who had jobs. In the 1950s, both groups were at that higher level. One reason is that wages for those without college plummeted. In 2015, college-educated men made $22 an hour versus $8 an hour for those without college.
Despite improving job opportunities, some older workers were unable to return to the labor force. That's called structural unemployment. That's when the skills of would-be workers no longer match what employers need.
The Federal Reserve Bank of Kansas found that demand for middle-skilled jobs has declined between 1996 and 2016. Middle-skilled jobs involve routine tasks that are easier to automate. Demand has increased for both low-skilled service jobs and high-skilled analytical or managerial positions. Both of those are more difficult to replace with a machine or computer.
Increased Use of Opioids
Fourth, there is an increased use of opioid medication. 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 meds. A study by Yale professor Alan Krueger shows how this affected the LFPR. He estimates that from 1999 to 2015, 20% of the LFPR decline for these men was caused by opioid dependency. Another study found that more than 1 million people are heavy users of opioid drugs. That's 0.5% of the labor force. Abuse of substances, including alcohol and tobacco, costs the economy $740 billion a year.
Too Sick to Work
Fifth, an increasing number of people are too sick or disabled to work. For example, 7.9% of those aged 65 or older cite those reasons for not being in the labor force. The Atlanta Fed found that Alabama, Louisiana, and Mississippi had especially low labor force participation rates. People in these states report that they don't participate in the job market because they are too sick or disabled to work. Chronic diseases that are the leading causes of death and disability in the U.S. include heart disease, cancer, and diabetes.
The Bottom Line
As a measure of a country’s active workforce in terms of its population, the labor force participation rate of the United States is far from stellar.
Despite a growing economy, U.S. LFPR remains weak since its dramatic fall during the 2007 financial crisis. The depressed state of the participation rate points to four main reasons:
- An aging population.
- Long-term unemployment situation, which increased the rate of structural unemployment.
- A significant decline in middle-skilled jobs that revolved around routines. Technology has taken over these.
- 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. For this reason, policymakers are formulating a number of options to increase employment rates and fight poverty.
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