Atlanta Fed Tackles the Question of Falling Labor Force Participation

Since the late 1990's, the labor force participation rate has steadily declined. However, since the Great Recession of 2008, the rate of decline has accelerated. The labor force participation rate is defined as the number of people in the labor force (those employed plus those unemployed, or defined as actively looking for work) divided by the population. Monday, the Atlanta Fed published a drat paper analyzing these trends and trying to find the root causes of the declining labor force.

The economists at the Fed attempt to distinguish between demographic effects and economic effects. It is no secret that the U.S. population is getting older, as Baby Boomer's enter retirement. Thus, one would expect a larger share of the population to be outside of the labor force than say 20 years ago, and so the labor force participation rate should fall. If the fall in the rate is due to this, it may have no long-lasting economic effects. However, if people are leaving the the labor force due to economic reasons, it could lead to a prolonged slowdown in the economy and a lower trend rate of GDP growth.

The Fed addresses this question be breaking down results into different age groups, for youth, working-age adults, and the elderly all may leave the labor force different reasons. The Fed divides reasons for leaving the labor force into five categories for its surveys: schooling, disability, household care, retirement, or other. The economists conclude that, for working aged individuals aged 24-56, most of the people leaving the labor force did so for schooling and other reasons, with the rate of those leaving for other reasons accelerating since the onset of the Great Recession. On the effects of other causes, the Fed has yet to discern if these have long-term negative economic effects as they need to sort through all of the responses given by those surveyed and as this is only a draft paper.

For other age groups, the Fed has yet to reach a solid conclusion, however they postulate that the increasing decline in the labor force participation rate of the elderly aged 56 and higher can in large part be attributed to Baby Boomer's aging and retiring but also due to companies firing older employees in favor of younger ones. Thus, there could be some economic effects on the elderly labor force.

Lastly, for the youth population, it appears evident that many youth cannot find employment because there are fewer summer jobs to be had due to the economy. However, this may also be skewed by students searching for employment while they are at school to pay for expenses, so the youth population is also still being investigated further.

If the participation rate continues to decline, it could have long term effects on the economy. If more people remain outside the labor force, it puts more pressure on those employed to finance their costs of living, through welfare programs such as Social Security and Medicare. Also, if companies trim payrolls not because of the economy but due to the fact that simply do not need so many employees, unemployment could stay higher for the long-term and may not ever return to "full employment." All in all, the final results will be waited for by economists to see what the true causes of declines in participation are and what the government should do about it.