An Aging Population Explains Most—But Not All—of the Decline in the US Labor Force Participation Rate Since 2007

July 7, 2017 4:15 PM
Photo Credit: 
REUTERS/Shannon Stapleton

The US labor force participation rate—the share of the civilian population ages 16 and older working or actively seeking work—has fallen from 66.0 percent in the fourth quarter of 2007 (the peak of the business cycle prior to the Great Recession, according to the National Bureau of Economic Research) to 62.8 percent in the second quarter of 2017, a 3.1 percentage-point decline.[1] In total, 2.5 percentage points of this decline—or 79 percent—is attributable to the aging of the US population, as the movement of a larger fraction of the population into older age groups that are less likely to participate in the workforce has mechanically lowered the overall participation rate. The remaining 0.7 percentage points of the decline—or 21 percent—reflects a combination of adverse trends in labor force participation that predate the Great Recession, permanent scarring as a result of the sustained high unemployment associated with the recession, and remaining slack in the labor market that would disappear with a stronger economy. This is equivalent to 1.7 million people no longer in the labor force.

The fraction of the adult population that is employed—the employment-population ratio—has fallen 2.7 percentage points from the fourth quarter of 2007 to the second quarter of 2017. This is slightly smaller than the fall in the labor force participation rate over the same period, because the latter decline has been partially offset by the decline in the unemployment rate from 4.8 to 4.4 percent. In total, 2.3 percentage points of the decline in the employment-population ratio can be explained by the aging of the US population—leaving it 0.4 percentage point, or the equivalent of 1 million people, worse than it was prior to the Great Recession.

These estimates do not provide a definitive answer as to whether or by how much the US economy is operating below its potential, or, in other words, how much slack remains in the US economy today. Answering this question also depends on an analysis of the cyclical position of the economy in the reference period of the fourth quarter of 2007, underlying nondemographic trends, and the long-term effects of the recession.

The Aging of the US Population Explains 79 Percent of the Decline in the Participation Rate

Older Americans are much less likely to work than younger Americans: The labor force participation rate for workers ages 25 to 54 averaged 81 percent in 2016, while the average for workers ages 60 to 64 was 56 percent. As a result, the aging of the population will tend to drive the labor force participation rate down, even if participation rates for particular age groups (older men, younger women, etc.) remain constant. This represents a “pure demographic” effect that largely reflects child-bearing decisions made decades ago.

To determine how much labor force participation has declined purely as a result of the aging of the US population, we can ask a straightforward question: What would the overall participation rate be today if the population maintained its actual age structure, but the likelihood of participation in the workforce for individuals at a particular age was the same today as it was in 2007? If this were the case, the labor force participation rate in the second quarter of 2017 would be 63.5 percent. This translates into an additional 1.7 million labor force participants, including an additional 1.6 million participants of prime working age. Thus, 79 percent of the decline in participation since the end of 2007 can be attributed to the “pure demographic” effect of the aging of the US workforce, as figure 1 shows (for more detail on this calculation, see the technical note at the end of this blog post).

Figure 1 Decomposition of the decline of the US labor force participation rate since 2007:Q4

Participation Has Fallen for Younger Workers and Prime-Age Men and Has Risen for Older Workers

The “other” component of the decline in the participation rate shown in figure 1 represents the net effect of changes in participation rates since 2007 within particular age groups. Table 1 helps to explore these effects by decomposing the “other” portion of the decline in the participation rate shown in figure 1 (0.7 percentage point) into the portions attributable to six age-sex groups.



Table 1 Contribution to non-aging component of decline in US labor force participation rate, 2007:Q4–2017:Q2 (percentage points)
  Men Women Total
16-24 -0.4 -0.3 -0.7
25-54 -0.5 -0.1 -0.6
55+ 0.3 0.3 0.6
Total -0.6 -0.1 -0.7
Source: Bureau of Labor Statistics, Current Population Survey; authors' calculations.

As Table 1 shows, within-group declines in participation among younger workers (ages 16 to 24) and prime-age men (25 to 54) have been important in explaining the decline in age-adjusted participation rates. Younger individuals have increasingly stayed in school, and are also less likely than in the past to work while in school. Since prime-age men still represent almost a quarter of the working age population, even relatively small declines in their participation rate can have a meaningful effect on the overall participation rate. At the same time, participation rates for older Americans have increased, in part due to increases in life expectancy, occupational safety, and educational attainment.

To put some longer-term perspective on these trends, figure 2 shows how the changes in this business cycle compare to the changes in previous business cycles. (These changes in participation rates are adjusted for changes in the age structure within each group.)

Figure 2 Change in labor force participation by age

Relative to the last business cycle, the pace of changes in participation within most demographic groups has slowed. While younger workers have seen declining participation rates since 2007, the pace of that decline has moderated relative to the experience prior to the Great Recession. This is also the case for older workers, for whom the pace of increasing participation has moderated. The notable exception is prime-age men, who have seen an even faster decline in age-adjusted labor force participation rates after the Great Recession than before it. Compared with the average over the last three business cycles, within-group participation growth has been weaker during the current cycle for all groups except older men.

After Adjusting for the Aging of the Population, the Fraction of the Population Working Has Almost Returned to Pre-Recession Rates

The employment-population ratio—the fraction of the civilian population ages 16 and older that is employed—has fallen from 62.8 percent in the fourth quarter of 2007 to 60.1 percent in the second quarter of 2017, a decline of 2.7 percentage points. This decline reflects a combination of the decline in the labor force participation rate and the fact that the fraction of the labor force that is employed has increased over this period (or, in other words, that the unemployment rate is lower today than in late 2007). Figure 3 uses the same methodology used to construct figure 1 to decompose the decline in the employment-population ratio into aging and non-aging components. As the figure shows, nearly the entire decline in the employment-population ratio since the end of 2007 is accounted for by the aging of the population.

Figure 3 Decomposition of the decline of the US employment-population ratio since 2007:Q4

What Does This Say about Slack in the US Economy?

The US unemployment rate is now below what it was at the end of 2007, and nearly four-fifths of the decline in the participation rate can be attributed to the aging of the population. Still, these facts do not provide a definitive answer about how much slack remains in the US economy—a question that also depends on wage and price trends that are not considered in this blog post. Moreover, several factors could affect the implications of these labor market data for the assessment of overall slack in the economy:

  • Was the economy at, above, or below full employment at the end of 2007? At the time, some analysts thought the US economy was actually above full employment, as evidenced by rising inflation rates. To the degree that this assessment was correct, then returning to similar labor market conditions (on an age-adjusted basis) today would indicate that the economy is over full employment. Other analysts, however, argued that the 2001–07 expansion was a weak, relatively jobless one, with large declines in participation, such that the economy was operating below full employment at the end of 2007—suggesting that we are in a similar position today.
  • Do changes in participation rates reflect trends that predate the Great Recession or the scarring associated with the recession? Male labor force participation rates have been falling since the 1950s, and women’s labor force participation rates have been falling since around 2000. Moreover, the sustained high levels of unemployment, especially long-term unemployment, seen during the last recession would be expected to have persistent effects on labor force participation. To the degree that the non-age component of the decline in the labor force participation rate is explained by these factors, it would mean the economy is currently at or above full employment.
  • Has the composition of employment shifted towards part-time jobs? Another argument for the continued existence of slack is that the fraction of the workforce employed part-time for economic reasons—those currently working part-time but who would prefer a full-time job—remains 0.4 percentage point above its value in the fourth quarter of 2007.

Technical Note

To calculate the effects on labor force participation of the aging of the US population, counterfactual quarterly histories of the labor force participation rate are constructed using data from the Current Population Survey. Participation rates for age-sex groups are held fixed at their 2007 annual average values, while each age-sex group’s population share evolves along its actual path since the fourth quarter of 2007.

Data for the following age-sex groups are used in constructing the counterfactual (since they are the most granular published by the Bureau of Labor Statistics on a not seasonally adjusted basis):

  • Men, 16-17
  • Men, 18-19
  • Men, 20-24
  • Men, 25-29
  • Men, 30-34
  • Men, 35-39
  • Men, 40-44
  • Men, 45-49
  • Men, 50-54
  • Men, 55-59
  • Men, 60-61
  • Men, 62-64
  • Men, 65-69
  • Men, 70-74
  • Men, 75 and older
  • Women, 16-17
  • Women, 18-19
  • Women, 20-24
  • Women, 25-29
  • Women, 30-34
  • Women, 35-39
  • Women, 40-44
  • Women, 45-49
  • Women, 50-54
  • Women, 55-59
  • Women, 60-61
  • Women, 62-64
  • Women, 65-69
  • Women, 70-74
  • Women, 75 and older

To correct for slight differences resulting from the use of non-seasonally adjusted data, the within-group labor force participation rates are scaled such that the counterfactual labor force participation rate is equal to the actual, seasonally-adjusted participation rate in the fourth quarter of 2007 for each age-sex group for which seasonally-adjusted data are available.

The non-aging contribution to the decline in the overall US labor force participation rate represents both the effect of changes in participation rates since 2007 within particular age groups and the interaction of these within group changes with changing demographics. The non-aging contribution for each of the six groups included in table 1 is calculated by determining the change in the group-specific labor force participation rate that is not due to aging and multiplying it by the group’s share of the working age population in the second quarter of 2017. The change in the participation rate not due to aging for each group is the difference between the total change and the change due to aging for that group (which is calculated following the same approach used to determine the change in the overall participation rate due to aging).

Note

[1] Numbers may not add up due to rounding.