Why Labor Force Participation Is Still so Low

By Allison Schrager
January 19, 2015 - Businessweek

The latest U.S. jobs report, released on Jan. 9, found that unemployment in the U.S. is nearly back to normal, at 5.6 percent. Still, a more telling statistic, the share of Americans in the labor force (people working or looking for work), barely budged at just 62.7 percent. That figure was significantly higher before the recession, at around 66 percent, but labor force participation started to fall in 2009 and has since been trending down.

This seems to confirm the worst fears of economists Larry Summers and Brad DeLong, who in a 2012 paper warned that unemployment could permanently damage the economy. Without government spending, that paper noted, unemployed people who couldn't find work would get discouraged, lose their skills, and drop out of the labor force indefinitely. 

New research questions whether that's what has been happening in recent years. Data from the the Census Bureau's Survey of Income and Program Participation, as Bloomberg Businessweek reported, shows that most people who left the labor force during the recession came from high-income households. That's surprising because skilled people with college degrees (who tend to have relatively higher incomes) faced much lower rates of unemployment. So why aren't these people in the labor force today? According to data from the Current Population Survey (from the Bureau of Labor Statistics and the Census Bureau) there are three main reasons the labor force participation rate fell: retirement, disability, and more people in school—with a discouraged worker falling into any of those categories.

The primary reason people don't work is retirement, and more people retired during the recession:

As the chart above indicates, a larger share of the U.S. population is now retired. That can mean either more discouraged workers (who may retire earlier than planned) or an older population. But as the second chart shows, the share of people aged 55 to 64 who retired actually fell from 20 to 16 percent from 2006 to 2014. Rather than dropping out of the labor force because they couldn't find a job, older Americans kept working. In other words, the recession seemed to keep more elderly Americans in labor force, probably because people couldn't afford to retire when they had originally planned. A growing number of retirees did contribute to the dwindling labor force, but only because the American population got older. There isn't much evidence that droves of elderly workers got frustrated with their job prospects and retired early.

The second-biggest reason people don't work is school. The share of non-working students increased from 5.8 percent in 2006 to to a peak of 7.1 percent in 2012; it comprised mostly individuals younger than 35. That figure increased because people went back to school when they couldn't find work, though it's likely to improve: Members of this group will probably look for work when the economy improves, and they may even have learned new skills. In fact, there are already signs that some people who went to school are returning to the labor force. School enrollment among those aged 20 to 29 is down from the its 2010 peak. In 2013 the share of non-working students started to fall. 

Combined, these trends explain why high-income households account for most of the shrinking labor force. There are fewer workers because more young people went to school (their parents' income counts as household income) and because only people who could afford to retire did so. But retirees and students can't account for all of the decline: Since the recession, the number of people not working because of a disability has steadily increased. And their numbers continue to increase five years into the recovery.

It may be that frustrated workers are using disability as a reason to drop out of the labor force—especially older people who couldn't afford early retirement. But there's also been a small increase in younger disabled workers, those aged from 25 to 54. In 2006, 4.5 percent of them didn't work because of a disability, compared to 5.3 percent in 2014. That trend is particularly worrisome because few will reenter the labor force. 

What does it all mean? The fact that a majority of labor force opt-outs are students or retirees from high-income households suggests that the recession wrought less damage to the U.S. workforce than was initially feared. Those people will either go back to work or would have left the labor force anyway. Still, the growing number of disabled workers indicates that the recession did inflict some permanent damage to the American labor force, and this could take years to repair.