Labor force participation and a working age population that won’t work

FRED is the go-to place for a bunch of economic data. A service of the Federal Reserve Bank of St. Louis, the site is easy to use and has a huge amount of data.

FRED also runs a blog that uses its data to answer—or at least address—some of the big data-driven questions of the day.

FRED’s blog is now looking at labor force participation. But, first let’s see why labor force participation is important.

Let’s begin with with unemployment. Unemployment is a simple concept: The number of people who don’t have a job, divided by the number of people in the labor force. The labor force includes those who are working and those who want to work. If you’re looking for a job, then you’re in the labor force. If you aren’t working and aren’t looking for work, then you’re not in the labor force.

  • If you’re retired, you’re not in the labor force because you left the labor force at retirement.
  • Many students are not in the labor force because their studies leave them no time to work.
  • If you look through the want ads searching for a job, you are in the labor force.
  • Once you stop looking through the want ads, you are not in the labor force.

Labor force participation is a big deal. It’s a measure of employment opportunities. If opportunities abound, the labor force grows as people look for income earning opportunities. As people give up on working, labor force participation drops.

FRED notes that while the rate decreased quickly during the previous recession and its recovery, the overall decline in labor force participation began several years before. FRED argues that maybe demographics is the cause. In particular, in the graph below, the proportion of the U.S. population 25 to 54 years of age follows a pattern similar to that of the labor force participation rate over the past 10 years. The 25-54 age group has the highest labor force participation rate. So, the argument goes, if the share of this age group is declining, the total labor force participation rate is likely to decline as well.

Bottom line: One reason why labor force participation has dropped is that a big chunk of the working age population (age 25-54) has shrunk.

OK, but that does not explain the drop in labor force participation among those who are working age, as shown in the figure below. The participation rate has dropped steadily since 2000. If the U.S. had the same labor force participation rate among 25-54 year olds that it had at the beginning of 2000, there would be 3.4 million more people in the labor force.

Bottom line: Aging boomers may explain some of the drop in labor force participation, but the bigger problem is a working age population dropping out of the labor force.