The American labor force, as a share of the overall population, has been shrinking for more than a decade. A detailed new report from the White House Council of Economic Advisers estimates the majority of that decline has been driven by the retirement of the Baby Boom generation and that only one-sixth of the decline is clearly attributable to the weak economy.
The so-called labor force participation rate, which tracks the share of the population either working or currently looking for work, climbed from around 60% in the late 1960s to over 67% in the year 2000, driven largely by a strong economy and by the increasing number of working women. Beginning in 2000, however, the labor force began to shrink and the decline has accelerated since the recession that began in 2007.
The decline has sparked a divide among economists, some of whom have attributed most of the gains to the simple fact that the Baby Boomers, who were born after World War II, are now reaching retirement age. Other economists, however, have argued the Baby Boomers explain a small part of the decline and the reason the labor force has fallen so much is that the economy has been historically weak and unprecedented numbers of Americans have lost their jobs and given up hunting for another one. (Research from different arms of the Federal Reserve, such as this paper from a Boston Fed conference and this paper from the Philadelphia Fed, have reached contradicting conclusions.)
The CEA’s paper lands in the middle of this debate, saying that of the 3.1% drop in labor force participation since 2007, 1.6% can be explained by demographics. About 0.5% can be explained by the historical pattern that some people in a weak economy are more likely to give up on the labor force. The CEA says the remaining 1% drop results from “other factors, which may include trends that pre-date the Great Recession and consequences of the unique severity of the Great Recession.”
The number of workers who left because of the weak economy but may return has been shrinking, the report concludes. By many measures the economy has been improving, albeit slowly, and around 1 million workers who were sitting things out may have already returned to the labor force, leaving fewer left sitting on the sidelines.
For many economic policy makers, the key question has been how much of the decline in the labor force could be reversed. The Fed, for example, generally believes that monetary policy cannot entice retirees who have reached their late 60s to return to work. But workers who abandoned the labor force out of frustration may be willing to resume their job hunts if the economy returns to strength.
The CEA’s conclusion is that 1.6% of workers are probably gone to retirement, 0.5% may return as they only left because the economy was weak, and that the divide among the remaining 1% is unclear.
Some economists have hoped that as the job market strengthens workers will flood back into the labor force, yet the CEA throws cold water on those hopes: “absent changes in policies, a meaningful increase in the participation rate from current rates appears unlikely.”
The CEA analyzes several scenarios for what could happen in coming years. In a best-case scenario, the labor force participation rate would rise from its current level of 62.8% to a little above 63%.
In most scenarios, however, the rate would hold steady for a few years and then resume its decline as more and more of the Baby Boomers born in the 1950s hit retirement age.
The report concludes by noting public policy still has a role to play, and suggests several parts of the White House’s economic agenda could help stem the flow of workers from the labor force. Training programs, working-families policies and the Earned Income Tax Credit all help promote labor force participation, the report says.
“Probably the most significant policy response to falling labor force participation rates is immigration reform,” the report says. “On average, immigrants are younger and participate in the labor force at higher rates than native-born Americans.”