Who Is Dropping Out Of The Labor Force, and Why?

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Although many economic indicators are heading in a positive direction, last week's December jobs report highlighted the problem of the declining labor force participation rate, the percentage of people aged 16 and over who choose to work or look for work.

The labor force participation rate moved back to 62.8 percent from its November level of 63 percent. In 2007, before the recession, 66 percent of Americans were in the labor force. Today's levels are equivalent to 1978, before the Reagan Revolution and the movement of women into the labor force during the 1980s.

Who is dropping out, and why?

A popular view is that labor force participation is declining because older people are retiring. But since 2000 the labor force participation rates of workers 55 and over have been rising steadily, and the labor force participation rates of workers between 16 and 54 have been declining.

What is clear is that the workforce is aging. Since the beginning of the recession in 2007, 2 million fewer Americans are employed. The 25 to 54 age group has seen a decline in employment of 6 million workers. The 55+ age group, in contrast, has seen an increase in employment of 4.8 million workers. Employment in the 16 to 24 group is down by 1.8 million.

The labor force participation rate of Americans aged 55 and over has increased by 4.6 percentage points from 2003 to 2013. Both men and women have seen increases in labor force participation rates and employment levels.

In contrast, for the 25 to 54 age group, the core group of workers in the labor force, participation rate has declined by 2 percentage points over the same time period, from 83 percent to 81 percent.

The biggest decline in labor force participation rates can be observed for workers aged 16 to 24. In 2013, 55 percent were participating in the labor force, compared to 62 percent in 2003, a decline of 7 percentage points.

If these young people were increasingly enrolled in school, then declining labor force participation might not be negative. They might be investing in education, resulting in better jobs later on in life. But no, the percentage of 16 to 24 year olds enrolled in high school, college, or university has risen by only three tenths of a percentage point over the past decade, from 56 percent to 56.3 percent.

The 55+ are the winners. Compared with all other groups, unemployment rates were lowest for the 55+ age group in 2013 and have seen the smallest increase since the recession.

Young workers entering the labor force are having a difficult time finding a job. Openings for unskilled workers often attract many more applicants than position. Colleges and professional schools have many graduates with no jobs.

One reason for few jobs for younger workers is the increasing labor force participation rate of older workers who are delaying retirement, leaving fewer job openings for younger workers.

Another reason is the slow GDP growth rate of around 2 percent, which results in low job creation. Younger workers, and middle-aged workers, become discouraged and drop out.

Of course, with lengthening life expectancies, it is good news that older people show increasing rates of labor force participation. The economy needs faster growth so that jobs can be created for the core 25 to 54 group, as well as for younger people.

The one bright spot in the economy: the low price of shale gas is attracting energy-intensive firms back to the United States and offers hope of a manufacturing renaissance. Jim Ratcliffe, chairman and CEO of the multinational petrochemical firm Ineos, interviewed in Saturday's Wall Street Journal, described the new "cracker" plants which turn cheap shale into ethylene, and then to a variety of plastics. These plants are located increasingly in America.

But other possibilities to jump-start economic growth, including fundamental tax reform, regulatory reform, entitlement reform, and immigration reform, will likely have to wait until after the 2014 elections. So will the lagging labor force participation rate.

Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is senior fellow and director of Economics21 at the Manhattan Institute. Follow her on Twitter: @FurchtgottRoth.   

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