If you’ve been following the latest jobs numbers, you probably noticed two things.

  1. The U.S. continues to add private sector jobs at a healthy pace
  2. Unemployment is gradually edging downwards.

Both are positive signs for our still sluggish recovery.

But behind the rosy headline stats lurks a disconcerting trend: our labor force is shrinking.

In October, the labor force participation rate (LFPR) declined to its lowest level since 1978 to 62.8 percent. While the steep month-over-month loss of 720,000 workers from the labor force is likely attributable to statistical noise, the drop is indicative of a downward trajectory in the LFPR that began in 2001 and accelerated during the 2007-2009 recession.

While about half of this decline was anticipated due to an aging population, the other half reflects persistent labor market weaknesses that endanger the economy’s long-run growth potential.

This post explores some of the reasons why the labor force has vanished. In my followup, I’ll explain some of the consequences.

Missing from the Narrative

The LFPR is defined as the share of the civilian non-institutionalized population 16 years or older (CNIP) that is either employed or actively searching for work. While it is less sensitive to the business cycle than unemployment, the LFPR provides a more complete picture of economic conditions by tracing movements into and out of the labor market that the unemployment rate, which excludes discouraged workers, might miss.

Beginning in the mid-1960s, the LFPR began a steady, two-and-a-half-decade rise as more women entered the workforce and Baby Boomers reached their prime working years.

The LFPR decelerated in the 1990s, peaking at 67.1 percent from 1997 to 2000, but then reversed course, declining to 66 percent by 2008. In the last five years, however, it has fallen an additional 3.2 percentage points—far faster than its trend trajectory.

Part of this decline has long been expected as the inevitable consequence of aging Baby Boomers. Demographics, not economics, are the primary determinants of labor force participation.

Between 2000 and 2010, the 55+ population grew 2.6 percent annually, a rate 6.5 times that of the prime working age population of 25-54-year-olds—a trend expected to continue during the next decade. By 2020, the 55+ population will make up 36.6 percent of the civilian non-institutionalized population, up from 26.4 percent in 1990.

Other demographic factors are also at play. The LFPR among 16-24-year-olds has fallen to a historic low, as increasing returns to education motivate young adults to stay in school longer and work less.

The Endless Workday

At the other end of the spectrum, older Americans are working longer, thanks to technological- and educational-based shifts to less physical professional and service sectors. Economists estimate demographic factors explain about half the drop in the LFPR since 2000, and between a tenth and a quarter of the decline since 2008.

More concerning is the 3.2 percentage point drop in participation that occurred since October 2008. This is two percentage points more than expected by demographic trends alone (as shown in Figure 1).



Another way to see the non-demographic decline in the labor force is to focus on the prime working-age population. While unemployment among 25-54-year-olds is about halfway back to its pre-recession level, the share of prime workers with jobs, measured by employment-to-population ratio, is still 4.2 percentage points below its normal pre-recession levels. (See Figure 2.)



The consensus among economists is that between half and three-quarters of the LFPR drop since the recession can be attributed to a weak labor market.

Some analysts have gone so far as to say that job stagnation accounts for more than the entire observed drop. In this view, the LFPR is as high as it is only because some workers have changed their behavior in response to economic conditions, for example, by increasing educational attainment or having fewer children.

Understanding why the labor force has declined is only part of the mystery. But what does it mean for the economy?

Check back tomorrow to find out.