Misunderstanding Declines In Labor Force Participation
This past Friday, like the first Friday of every month, saw the release of the latest jobs numbers. Within minutes of the release, analysts left, right, and center began pointing nervously at August's decline in labor force participation-the fraction of adults who are working or looking for a job. Several hundred thousand Americans became demoralized and gave up looking for work, said the left. Labor force dropout concealed an unemployment rate exceeding 11% at the close of Obama's first term, said the right. Labor force participation was at its lowest since 1981, and "at an all-time low" among men.
Hold the phone. The labor force participation rate can decline for reasons that should concern us, as when increasing numbers of the unemployed give up looking because of a terrible labor market. That is what most observers have in mind when they see labor force participation falling. But it can also decline for reasons that are either benign or that should cheer us. For instance, as we have grown richer over time, the duration of our working years has shrunk. The typical worker retired at 70 sixty years ago; today he retires at 63. That's a decline in labor force participation.
In fact, the small August drop in labor force participation-which at any rate is not statistically reliable and may be overturned when the final numbers come in next month-almost surely did not reflect rising discouragement among job-seekers. This is readily seen by comparing the so-called "U4" jobless rate-which combines the unemployed and "discouraged workers"-to the official "U3" unemployment rate. Both fell by 0.2 percentage points between July and August. If the fall in labor force participation had been about hopelessly unemployed people, the change in the U4 rate would have looked worse than the U3 change.
To gain some perspective, let's step back and look at the long-term trends in labor force participation among men. That's where the declines are. Start with teens and young adults. After rising over the course of the 1970s, the labor force participation of men between the ages of 16 and 24 has declined markedly since 1979. The 2011 rate was the lowest since data became available in 1948.
Terrible news? No, what the data show is an impressive rise in school enrollment among teens and young adults. The decline in labor force participation among young men was from 75% in 1979 to just 57% in 2011. That 18-point drop is mirrored in data from the Department of Education showing that male school enrollment rates rose between 1980 and 2010. Enrollment rose by 20 points for 18- to 19-year-olds, and by 16 points for 20- to 22-year-olds. It also rose by 8 points among 16- to 17-year-olds and by 9 points among 22- to 24-year-olds. Averaging the rates across the four (roughly) equally-sized groups indicates that the school enrollment rate rose 13 points from 1980 to 2010, from 47% to 60 percent. There are, of course, many young men who simultaneously work and attend school, but the fraction of 18- to 24-year-old college enrollees (of either gender) who attended part-time was 20% in 1980 and 20% in 2010.
By the way, labor force participation trends for the supposed "lost decade" from 2000 to 2010 are entirely consistent with the longer-term pattern. Nor does the period since the financial crisis look unusual. When I projected trends between 1948 and 2000 forward to 2011, the 2001-2011 levels lined up very well.
Next, let's look at prime-age workers-those between the ages of 25 and 54 years old. Fully 97% of working-age men were in the labor force in 1948, but that figure fell steadily to 89% last year. The key word here is steadily-projecting the 1948-2000 trend forward to 2011 produces a 2000-2011 trend hardly distinguishable from the actual one.
The drop over time is not negligible, but it should hardly be surprising. Working-age male labor force participation was essentially universal 60 years ago, wives were much less likely to work than they are today, and the typical household is well more than twice as rich as it was. Nobel-Prize-winning economic historian Robert Fogel projected, a decade ago, that we would have a thirty-hour work week by 2040, given the trends over the past century. The evidence suggests that men have chosen more leisure, and in fact, despite rising labor force participation, women enjoy more leisure too because their hours of housework have dropped by more than their working hours have increased.
For some time, the Bureau of Labor Statistics has tracked how many Americans out of the labor force say they want to work. When I previously examined this data for working-age men, I found that only about 15% of those out of the labor force in 2007 wanted to work. More importantly, that was the same share as in 1969. The long-term decline in labor force participation apparently has little to do with declining success finding work among Americans who want a job.
Labor force participation among older men is actually rising, so there is no reason for concern about declining labor force participation among them. But older Americans contribute to declining labor force participation too. Even if their rates continue to increase, they will remain well below those of younger workers. As the baby boomers engorge the ranks of these low-participation age groups over the next twenty years, the result will be that labor force participation among all adults will decline for some time. That won't be a bad thing.