Why has the U.S. labor force participation rate declined?

Interpreting movements in the unemployment rate amid the continuing recovery from the Great Recession can be tricky. The share of people with or looking for a job—a measure known as the labor force participation rate—was already declining when the financial crisis hit in 2007, which pushed even more workers out of the labor force. The pre-recession decline in the share of workers in U.S. labor force is primarily being driven by a major structural change—the retirement of the aging Baby Boom generation. But a new National Bureau of Economic Research working paper argues there’s another important long-term trend at work.

Regis Barnichon and Andrew Figura argue that a significant decline in individuals that actually want to work has contributed to the decreasing labor force participation rate. In fact, Barnichon and Figura’s results show this trend is about as important as the aging of the population to the decline in participation. Using data from the Bureau of Labor Statistics’ Current Population Survey, the two authors from CREI and Universitat Pompeu Fabra, and the Federal Reserve Board split non-participants into two groups: those who want to work and those who don’t (they can do this because the CPS asks individuals not in the labor force about their desire to work and records it in the survey). They find a stark rise in the share of non-participating workers that don’t want to work at all since the mid-1990s. That increase is because those individuals out of the labor force are less likely to decide they want a job, and those that do want a job are increasingly joining the ranks of those who do not want a job.

Why would this new composition of non-job seekers matter? This is the tricky part. Barnichon and Figura show that non-participants in the labor force who actually do want a job are, unsurprisingly, more likely to look for work. Yet the increasing number of non-participants who really don’t want a job means that the reserve of workers who are likely to enter the work force has declined over the past two decades.

The two authors point to differing reactions by participants in the labor force to federal government programs such as Aid for Family with Dependent Children and the Earned Income Tax Credit as the reason for the continuing decline in the labor force participation rate. These programs encourage people to work by increasing their income through tax credits if they are working, placing time limits on government assistance, and requiring them to look for work if they don’t have a job. But Barnichon and Figura argue that for some people these work requirements discourage them from remaining in the labor force. The two authors suggest that people who don’t want to work are instead applying and receiving disability insurance through the Social Security system.

But other causes are conceivable. Perhaps workers who lost their jobs over the past several decades amid often wrenching economic dislocation—think about the dislocations due to massive job losses across the Rust Belt or in specific industries like, say, bricks-and-mortar travel agencies or book stores—were more likely to be knocked out of the labor force permanently. Or consider another finding in the new working paper by Barnichon and Figura—that the decline in the labor force participation rate since the mid-1990s was particularly strong among women—which may be explained by women choosing to concentrate full time on family and housework instead of job hunting or working outside the home.

The reasons for the rise in the number of people not looking for work aren’t entirely clear or well researched. Hopefully that will change.

June 10, 2015

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