Lost Workers Finance & Development, September 2015, Vol. 52, No. 3
Ravi Balakrishnan, Mai Dao, Juan Solé, and Jeremy Zook
Reversing the decline in U.S. labor force participation is essential to boosting growth in the world’s largest economy
It is not supposed to be this way. As the U.S. economy recovers, hiring increases and people who had stopped looking for jobs when times were bleak should be inspired to look again. Instead, the proportion of the U.S. population 16 years and older with a job, or looking for one—the labor force participation rate—continues to fall. It went from about 66 percent at the start of the global financial crisis to 62.6 in June 2015 (see Chart 1), its lowest point since 1977.
What is more remarkable is that half of the gains in participation rates between 1960 and 2000—those driven by sweeping social changes such as the post–World War II baby boom and the entry of women into the workforce—have been reversed in the past seven years. The equivalent of 7.5 million workers has been lost from the U.S. labor force.
Critical for the U.S. economy The future dynamics of the U.S. labor market matter for two crucial reasons. First, the size of the labor force will be central to determining the pace of U.S. economic growth over the next 5 to 10 years. And because the U.S. economy is the world’s largest, its trajectory is crucial to global growth. Second, the extent to which the recent declines in participation rates are reversible will be a principal factor affecting future wage and price inflation and, as a result, the timing and pace at which the Federal Reserve, the U.S. central bank, raises interest rates. The level and direction of U.S. rates have broad effects on capital flows around the world—especially on movement in and out of emerging market economies.
The aggregate labor force participation rate had been declining since 2000, long before the onset of the Great Recession. The golden era for increasing labor force participation was 1960–90, when rates increased from 60 to 66 percent. This reflected the post–World War II baby boom generation reaching adulthood and women’s increasing presence in the workforce. But this boost to the size of the labor force started to fade in the 1990s as baby boomers began to retire and participation rates for women began to decline. Indeed, since the bursting of the dot-com bubble and the 2001 recession (when many Internet-based companies failed), the labor force participation rate has continued to fall.
For men, the trend is longer lasting: male participation rates have been declining since records began in 1948. The downtrend for prime-age males has been of particular concern, and much research has focused on declining labor market opportunities and the associated stagnant wage growth for low-skilled...