Atlanta Fed 2013 Annual Report: Labor Force Participation
´╗┐Millions Have Left the Labor Force for Varied and Complex Reasons

The unemployment rate not only reflects the number of people who say they looked for and couldn’t find work, but also people’s decision to look for work in the first place. Participation in the labor market has been declining in recent years for reasons that are not totally understood.

The labor force participation rate has been falling since the early 2000s, and that trend has accelerated since 2007. Between 2000 and 2007, the participation rate declined by about 1 percentage point. It dropped by another percentage point between 2007 and 2009, and by a further 2 percentage points since then. By the end of 2013, labor force participation reached the lowest level since the late 1970s.

The health of the labor market clearly affects individuals’ decisions to enroll in school, apply for disability insurance, or stay home and take care of family. Discouragement over job prospects rose during the Great Recession, causing many unemployed people to drop out of the labor force. The rise in the number of marginally attached workers reflects this and can account for some of the decline in participation between 2007 and 2009.

Discouragement may be a factor even when people say they don’t currently want a job. The share of people aged 25–54 who said they didn’t currently want a job remained relatively stable between 2002 and 2009, but has risen by almost 2 percentage points since then. It seems likely that some of the recent increase is associated with a rise in discouragement over job prospects.

However, the labor force participation rate can decline for other reasons. The most important of these is the aging population. For example, the share of the population aged 55 and older has risen by almost 4 percentage points since 2007. Because this age group also has a relatively low rate of labor force participation (because of higher levels of retirement and disability), the aging of the population is putting significant downward pressure on overall labor force participation.

Most research, including work done at the Atlanta Fed, suggests that about half of the decline in labor force participation since 2007 can be attributed to the ongoing compositional changes of the U.S. population. The rest is the result of declines in participation within demographic groups, especially by young people but also by men and women aged 25–54.

How much do these trends reflect changes over time, and how much can they be attributed to the recession and slow recovery? It’s hard to say with certainty. For example, young people have been enrolling in school in larger numbers since the late 1980s, but enrollments accelerated somewhat after 2007. Some people will reenter the labor market as it strengthens. But for others, the prospect of not finding a satisfactory job will cause them to continue to stay out of the labor market. Overall, labor force participation is expected to edge down slightly more over the next few years. The effect of the ongoing aging of the population will dominate, only partially offset by upward pressure from improving employment prospects.