Atlanta Fed Tackles Falling Labor Force Participation
Since the late 1990s, the labor force participation rate has been steadily declining. However, since 2008, this rate of decline has accelerated. The Atlanta Fed published a drat paper on Monday analyzing these trends and trying to discover the root causes of the decline in the labor force participation rate.
The labor force participation rate is defined as the number of people in the labor force (those employed plus those unemployed, or defined as those actively looking for work) divided by the population.
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 the Baby Boomer generation increasingly enters retirement. Thus, one would expect a larger share of the population to be outside of the labor force, and so the labor force participation rate should fall. This might 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 by breaking down results into different age groups: youth, working-age adults, and the elderly. The Fed divides the reasons for leaving the labor force into five categories for its surveys: schooling, disability, household care, retirement, or other. The economists conclude that, for 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 2008. On the effects of other causes, the Fed has yet to discern if these have long-term negative economic effects.
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 among the elderly can, in large part, be attributed to retirement and also due to companies firing older employees in favor of younger ones. Thus, there could be some economic effects on the older members of the labor force.
Lastly, for the youth population, it appears evident that many youth cannot find employment as there are fewer summer jobs to be had. However, this may also be skewed by students searching for employment while they are at school to pay for expenses, so the youth population remains under investigation.
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 cost of living, through welfare programs such as Social Security and Medicare. Also, if companies trim payrolls because they do not need so many employees, unemployment could stay higher for the long-term and may not ever return to "full employment" levels.
Still, the Fed's paper is just a draft and economists will await the final results.
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