Labor Force Participation Rate and Why It Won't Improve

Five Reasons Why Workers Dropped Out and Won't Come Back

Middle age man
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The labor force participation rate refers to the number of people available for work as a percentage of the total population. In September 2018, it was 62.7 percent.

It measures the amount of labor in an economy, one of the factors of production . The other three are natural resources, capital, and entrepreneurship.

LFPR Formula

Here's how to calculate the labor force participation rate:

LFPR = Labor Force / Civilian Non-Institutionalized Population 

where the Labor Force = Employed + Unemployed

To calculate the formula correctly, you must first understand the underlying definitions outlined by the Bureau of Labor Statistics. The BLS is the Federal agency that reports on the labor force and its participation rate every month in the Jobs Report. Here they are:

Civilian non-institutional population - Everyone living in the United States who is 16 or older minus inmates of institutions such as prisons, nursing homes, and mental hospitals and minus those on active duty in the Armed Forces.

Labor force - Everyone who is classified as either employed or unemployed.

Employed - Anyone aged 16+ in the civilian non-institutional population who worked in the last week. They are those who worked an hour or more as paid employees or 15 hours or more as unpaid workers in a family-owned business or farm. It also includes those who had jobs or businesses, but didn't work that week because they were on vacation, sick, were on maternity or paternity leave, on strike, were in training, or had some other family or personal reasons why they didn't work.

It doesn't matter whether it was paid time off or not.  Each worker is only counted once, even if they hold two or more jobs.  Volunteer work and work around the house do not count. 

Unemployed - Those aged 16 or more who weren't employed, but are available for work and are actively looked for a job within the past four weeks.

People who are only waiting to be recalled to a job from which they had been laid off are counted as unemployed, even if they didn't look for work. Contrary to popular belief, it has nothing to do with the number of people who applied for or receive unemployment benefits. Instead, this figure is derived from a BLS survey. The BLS sets the definition of unemployment.

People who would like work, but haven't actively looked for it in the last month are not counted as being in the labor force no matter how much they want a job. But they are counted in the population. 

The BLS does keep track of them. It calls some of them "marginally attached to the labor force." These are people who have looked in the past year but just not in the previous month. They might have had school or family responsibilities, ill health, or transportation problems that prevented them from looking recently.

The BLS calls some of the marginally attached, "discouraged workers." These people have reported that they've given up looking for work because they don't believe there are any jobs for them. Others have become discouraged because they lack the right schooling or training. They worry that the potential employer thinks they are too young or too old.

Some have suffered discrimination. They are counted in the real unemployment rate.

The other group that isn't included in the labor force comprises students, homemakers, retired people, and those under 16 who are working. Still, they are counted in the population.

Current Rate

Here's how to calculate the labor force participation rate for August 2018.

 Number (in millions)  Percent 
Population (P)      258.290 
Not in Labor Force        96.364 
  Marginally attached          1.577 
      Discouraged          0.383 
Labor Force (LF)       161.926 62.7% of Population
   Employed       155.962 60.4% of Population
   Unemployed           5.964   3.7% of Labor Force

History

The labor force participation rate increased from 1948 until the late 1990s. From 1948 to 1963, the rate remained below 60 percent. But the rate slowly inched up as more women entered the labor force, breaking 61 percent in the early 1970s.

It rose to 63 percent in the 1980s and reached a peak of 67.3 percent in 2000.

Once the 2001 recession hit, the LFPR fell to 66 percent. It didn't improve throughout the "jobless recovery." The 2008 financial crisis sent the participation rate below 66 percent. It's continued falling ever since. By August 2015, it reached a low of 62.6 percent. 

That drop should mean that the supply of workers is falling. Fewer workers should be able to negotiate for higher wages. But that didn't happen. Instead, income inequality increased as average income levels suffered. Workers couldn't compete when jobs were being outsourced. They also couldn't compete with robots. Businesses found it more cost effective to replace capital equipment instead of hiring more workers. 

Five Reasons the LFPR Fell and Might Not Get Up

It's unlikely the participation rate will ever return to its 2000 peak. Economists are divided on how much of the recent drop in the LFPR was due to the recession. Estimates range from 30 percent to 50 percent to as much as 90 percent. Even the most conservative estimate says that the recession forced nearly a third of workers out of the labor force.

Many of those workers never returned even once jobs become more available. Here are the five reasons according to research:

According to the , half of the decline is due to the . These demographic changes affected the labor force even before the recession. As baby boomers reach retirement age, they leave the labor force. They don't need a job. Others stay home to care for ailing parents or spouses or claim disability themselves. Since they represent such a large percentage of the population, they will have a major impact on the labor force participation rate. It's a big reason why it may never regain its past levels, no matter how strong the job market is.

Second, 24 percent of the unemployed have been without a job for six months or more. Only 10 percent of these long-term unemployed find a job each month. It became so frustrating that many dropped out of the labor force. They may never return. They don't have updated skills and employers aren't willing to take a chance with them. 

Third, millions who left the labor force were between the ages of 25 and 54. That's prime earning years. Some were students who stayed in school longer. The Atlanta Fed estimated that this decrease in the labor force contributed a 0.5 point drop in the participation rate. Fewer of those students worked while they were in school. But anyone who wasn't employed during their prime earning years .

Men in that age group who lacked college degrees also dropped out. In 2017, only . That's lower than the 90 percent of male college graduates who had jobs.In the 1950s, both groups were at that higher level. One reason is that wages for those without college plummeted. In 2015, college-educated men made $22 an hour versus $8 an hour for those without college.

Despite improving job opportunities, some older workers were unable to return to the labor force. That's called structural unemployment. That's when the skills of would-be workers no longer match what employers need. The  that demand for middle-skilled jobs has declined between 1996 and 2016. Middle-skilled jobs involve routine tasks that are easier to automate. Demand has increased for both low-skilled service jobs and high-skilled analytical or managerial positions. Both of those are more difficult to replace with a machine or computer.

Fourth, there exists the . Almost half of prime age men not in the labor force take pain medication daily to treat chronic health conditions. Two thirds of them are on prescription meds. A study by Yale professor Alan Krueger shows how this affected the LFPR. He estimates that from 1999 to 2015, 20 percent of the LFPR decline for these men was caused by opioid dependency.  that one million people are heavy users of opioid drugs. That's 0.5 percent of the labor force. It cost the  a year. It slowed economic growth by 0.2 percent. 

Fifth, an increasing number of people are too sick or disabled to work. For example, 13.2 percent of those aged 56 to 60 cite those reasons for not being in the labor force. The Atlanta Fed found those contributed 0.6 percent of the decrease in the LFPR. The level of sickness is highest in Mississippi, Alabama, Kentucky, and West Virginia. The two biggest illnesses are diabetes and high blood pressure.