The Labor Force Participation Rate: A Rexamination Of The Determinants Of Its Decline

Abstract

The U.S. Labor Force Participation Rate (LFPR) is defined as the number of people in the labor force as a percentage of the civilian noninstitutional population 16 years and over. In a paper published in November, 2013, we examined the determinants of the decline in the LFPR from a 1998 peak of 67.2% to then, 63.3%. Consensus of a number of economic studies at that time was that the primary determinant of the decline was cyclical and that an improving economy would stop, if not reverse, the downward trend. Since that time the unemployment rate has declined from 7.2% to 5.3%. However, the LFPR has continued its decline to 62.6%. Structural issues in the economy would appear to have far greater effect on LFPR decline than previously believed. In this paper we examine the following classes of structural determinants and their effects on LFPR: demographics, including not only the prime working cohort of ages 25 to 54, but also those of retirement age; the impact of a welfare system that appropriately provides a critical safety net, but one that reduces incentive to work through disability payments, extended unemployment benefits, and other subsidies; education for both those of a higher level of attainment, as well as an underclass that no longer receives training by business, but must rely on both public and private vocational education; and finally the consequences of globalization on the economy, including the virtual disappearance of semi-skilled industries in the United States that heretofore have provided jobs for high school graduates.