Last updated: April 11, 2019
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Factors Determining Historical Trends in Labor Force Participation Rates

Human capital is very important in the overall performance of the economy because it is one of the factors of production. Although there are machines, the labor of human is still needed by the industries especially by businesses providing services. Labor is a contributor to the gross domestic product (GDP) of a country thus full understanding of labor mechanics can help in the improvement of the economy.

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Labor force participation rate (LFPR) determines the size of labor force which is a component in determining and forecasting the potential GDP growth i.e. the increased participation of women expanded the labor force and potential GDP as well. LFPR is also important for assessing the movements of the labor market because considering unemployment rate alone will not give a reliable indicator of the labor market conditions i.e. the end of 2001 recession to 2005 marked a lag in job creation but the unemployment rate remained low. Determining the participation behavior of workers is important because there are many reasons why workers join labor force (Juhn & Potter, 2006, p. 27-28).

The labor market equilibrium is characterized by a market clearing level of employment corresponding to a level of output. This equilibrium is determined by the full-employment schedule (FE line) which is independent of the level of prices and interest rates. Goods market (IS) and assets market (LM) a model on the space of interest rates and output. The three market schedules constitute the general equilibrium of an economy (see figure 1 below). Labor market is characterized by slow adjustment when economic shocks are applied thus the effects of shocks will be best seen in the long-run. The long-run equilibrium is the intersection of IS, LM and FE curves (figure 1). The long-run adjustment of the labor market can be distinguished into two periods: when there is above full employment and below full employment.

Figure 2 below shows us the relationship of LM curve to the FE line.  When labor market is above full employment, prices will increase and the real money supply falls (LM curve shifts to the left) and then the  output will begin to fall. When labor market is below full employment the prices fall and the real

P increases

LM shifts in

P decreases

LM shifts out

money supply rises (LM curve shifts to the right/out) (Denhaan, 2002).                                                                       Figure 1                                                            Figure 2                  Y

LFPR can be divided into two interests: changes in population weights of each subgroup and changes in the participation rate of each cohorts or groups. People born during the baby-boom generation (from 1946-1964) increased the population weight of workers. Figure 3 and 4 (Juhn & Potter, 2006 p. 30) show the male and female total labor force participation rate by each age group in the United States.

Figure 2                  Figure 3 à

This gives us a general conclusion that male participation level decreased while female participation level increased in all age group. The factors that triggered the fluctuations will be discussed one by one below.

Participation of Women in Labor Force

Households nowadays engage in having two or more workers to compensate with the high costs of living. The progressive acceptance of women in different industries triggers the rising participation of women in labor force. However, women have more dilemmas than men because they have children to attend to and women with younger children work fewer hours than those with older or no children at all (Smith, 2008).

Table 1 (Mosisa & Hipple, 2006, p. 46) below shows us the labor force participation rates of the female in US for the past 15 years.

Table 1: Labor force participation rates of women, by age, annual averages, 1989–2005
Year
25 to 54

Years
25 to 29

Years
30 to 34

Years
35 to 39

Years
40 to 44

years
45 to 49

years
50 to 54

years
1989

1990

1991

1992

1993

1994

1995

1996

1997

 

1998

1999

2000

2001

2002

2003

2004

2005
73.6

74.0

74.1

74.6

74.6

75.3

75.6

76.1

76.7

 

76.5

76.8

76.7

76.4

75.9

75.6

75.3

75.3
73.9

73.6

73.2

74.1

73.6

74.3

74.9

75.8

77.3

 

77.3

76.9

76.7

75.7

75.7

74.4

73.1

74.0
73.1

73.3

73.0

73.7

73.3

73.7

75.0

74.7

74.9

 

75.4

75.9

75.5

75.3

74.6

73.8

74.0

73.9
75.0

75.5

75.6

75.5

75.3

76.0

76.3

76.5

76.6

 

75.6

76.2

75.7

76.1

75.3

74.5

74.5

74.6
77.2

77.5

77.6

78.1

78.0

78.3

78.1

78.6

78.9

 

78.6

78.2

78.7

77.5

77.4

76.7

76.7

76.8
74.3

74.7

75.4

75.7

76.4

77.6

77.2

78.0

78.1

 

78.8

78.9

79.1

78.5

77.8

78.6

78.2

77.7
65.9

66.9

67.8

68.7

69.8

70.7

70.7

71.9

73.5

 

73.0

74.0

74.1

74.1

74.0

74.7

74.5

74.0
Table 1 exhibit that women participation rate levels are increasing over time however it must be noted that after 2001 recession the participation rates of all age groups started to decline. From 1979 to 1989, the total LFPR of United States increased by 2.8% and the 3.5% of this increase was contributed by the women entry in the labor force. But during the 1990’s, female participation rate slowed down and contributed only an average of 1.4% increase. The active women entry in the labor force is seen the major reason of the overall participation rate change during the past few decades (Mosisa ; Hipple, 2006, p. 43-45).

Labor Force Participation of Young Individuals

Younger workers are divided into two subgroups: teenage workers (aged 16 to 19 years) and young adults (20-24 years). In 2005, the LFPR of teenagers hit the lowest record with only 43.7%. Male teens have larger participation declines than female teens among all the race and ethnic groups. The increase in school enrollment is one of the reasons of teenagers’ participation decline. Bureau of Labor Statistics (BLS) statistics showed that in 2000 to 2005 teen school enrollment rate rose by 5.6%, from 76.9% to 82.5%. At the same period, LFPR of enrolled teens declined by 6.7%, from 43.0% to 36.3%. However, it is not only the rise in school enrollment that caused the LFPR of teens to shrink because participation of out-of-school teens also declined. Other factors like personal choice, lack of motivation, rising family incomes and competition for jobs contribute to the decrease in labor participation (Mosisa ; Hipple, 2006, p. 38-39). Teens do not only compete in job-seeking with their fellow teens because during recession periods, some elders apply to jobs that are usually done by teens i.e. gasoline boy/girl. Panic drove elders to grab any job than to have no job at all. Obviously, employers are to hire older and experienced workers than young and inexperienced teens. Teens also face competition with older foreign-born workers with lower-levels of education (Mosisa ; Hipple, 2006, p. 38).

Concurrently, young adults also exhibit a decline in LFPR because many have difficulty in finding jobs. Dissimilar to the teens, young men participation is higher than of the women because some young women take care of their young children. However, in the long run, the gap of young men and women’s LFPR is narrowing: an indication of increasing women pro-activeness in labor market and decline in participation of men. Young men with lower level educational attainment (high school dropouts) still have higher LFPR than young women of the same level of education but as the two genders attain higher education, the narrower the gap of participation rate will be (Mosisa ; Hipple, 2006, p. 39-42).

Adult Labor Force Participation

The LFPR of adult women (25-54 years old) grew steadily after the World War II but the pace of increase varied and the largest increase occurred in 1970’s with 13.9% and followed by 1980’s with 10.0%. The increase continued and reached its peak of 76.8% in 1999, however, the participation rate flattened out after. By 2005, LFPR began to recede slightly to 75.3% but still higher than those of the ‘70s, ‘80s, and ‘90s. As shown in Table 1, on the average, there is an increase in the participation rate level of ages 24 to 54. The decision to participate of mothers is dependent on their educational attainment and presence and age of children. From 1994 to 2005, the LFPR of married mothers with higher levels of education declined by 3.2%. This drop is relatively higher than for those with some college and no college (2.6% and 2.8% respectively). The significant drop in participation of well-educated married mothers is mainly pronounced by mothers with preschool children. From 1999 to 2005, the LFPR of unmarried women with children under 18 years increased by 8.8% (Mosisa ; Hipple, 2006, p. 42-47).

For the past 50 years, it has been a surprise that the participation rate of men in this group has declined. During 1950’s the participation rate for men is 97.4% and this rate has undergone steady decreases year by year until it reached 90.5% in 2005. Men in 50 to 54 years age subgroup are less likely to participate than the other age groups because of aging and pension available for them. Regardless of the ethnicity and education, adult men participation still decreased. Black men rate fell by 7.0% since 1973 compared with the 3.9% fall in participation of the whites. As expected, men with higher educational attainment are more likely to stay and participate in the labor force. The largest decline since 1970 was among with lesser education because jobs for less educated adult men became undesirable and the demand for less-skilled workers declined thus the wages offered to them is low. Thus there were lesser opportunities for less-educated men and the participation of this subgroup did decline. The enacted Social Security Disability in 1956 also contributed to the fall of adult men participation for some of them depend on its benefits. The rise of beneficiaries from 2.9 million to 6.2 million coincides with the fall of participation of adult men (Mosisa ; Hipple, 2006, p. 47-49).

Labor Participation of Elders

Table 2

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Older workers (55 and above years old) have tended to retire at earlier ages. The long decline in participation rates of older men is due to the Social Security: a rise in income which makes savings for retirement easier (Costa, 1998). However, a number of other studies concluded that the impact of Social Security and pension plans have only minimal effect on the fall of men participation. Table 2 (Juhn ; Potter, 2006, p. 40) shows that the LFPR of 1911-1915 and 1916-1920 cohorts fell sharply. Men born in those cohorts have reached retiring age in the 1970s; the time when Social Security benefits are increasing. The participation of 60-64 years old men with higher retirement income fell about 6.4% compared with the cohorts born five years earlier from them. However, the Social Security has insignificant effects on the participation of birth cohort 1916-1920 because at that time, the security act was modified and the benefits were reduced. Cohort born after 1936 (who reached 65 by 2001) has increased LFPR because there was a movement from defined-benefit to defined-contribution plans. Defined-contribution plans increase retirement benefits and assets regardless of age thus more workers choose to stay in labor force to increase future financial assistance. Other workers also delay retirement to still enjoy the health insurances of their employers until they would be eligible for Medicare (Juhn ; Potter, 2006, p. 40-41).

The labor force participation rate in United States has indeed declined after the steady increases for about the past four decades. Young adult participation also decreased but not as much as of the teenagers. The largest drop in LFPR is among the teenagers. High school dropouts especially young women with children are most likely not to be working neither looking for work. Women of younger cohort (25-29 years) recorded the largest decrease in participation rate among other adult women cohorts. Adult women participation steadily increased over the past five decades but is decreasing in recent years. The decrease in LFPR of mothers with higher education is larger than those mothers with less education because they choose to take care of their children. Adult men participation rate consistently fell down during 1950s to 1990s and since1990, the decline rate grew rapidly. During the 25 years, less educated men are more likely to not participate in labor force than the well-educated.

Labor force will slow down for the next ten years because of the looming retirement of the baby-boom generation. The participation rate growth of women is expected to slow down but will still increase at a faster rate than men. The participation of youths (16-24 years old) is also anticipated to decrease while participation rate of prime-age workers is expected to increase slightly but their share on the labor force is seen to decline. Lastly, for the next decade, the participation rate of older workers (55 and older) is projected to increase significantly (Toossi, 2007, p. 51).

References

Costa, D.L. (1998). The Evolution of Retirement: An American Economic History: 1880–1990.             Chicago: The University of Chicago Press.

Denhaan,W.J. (2002) Part E.I: The IS-LM model [a Powerpoint lecture presentation] delivered for ECON110A class.

Clark, T.E., Nakata T. (2006). The Trend Growth Rate of Employment: Past, Present, and Future. Economic Review, First Quarter 2006, 43-85.

Juhn, C., Potter, S. (2006). Changes in Labor Force Participation in the United States. Journal of             Economic Perspectives, 20, 27-46.

Mosisa, A., Hipple, S. (2006). Trends in labor force participation in the United States. Monthly Labor Review, October 2006, 35-57.

Toossi, M. (2007). Employment outlook: Labor force projections to 2016: more workers in their golden years. Monthly Labor Review, November 2007, 33-52.

Smith, S. (2008). Labour Economics: Lecture 2: Labour Supply Theory and Policy [a      Powerpoint lecture presentation] delivered for EC3006N at London Metropolitan       University.

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