A Closer Look At Labor Participation Rates: Part 1

by: Robert Brusca

Sliding labor force participation rates have 'helped' to make this recovery stronger by augmenting the drop in the rate of unemployment. A drop in the participation rate means that people have left the labor force and that means they are not counted as unemployed. But how important, powerful and unusual is this effect?

The table below can help to sort this out.

The table presents a comparative static look at labor force participation rates of various sorts. We look at the change in participation rates from the end of various recessions to the 31st month of recovery. We analyze that snap shot. The 1980 recession's recovery did not last that long so it is omitted. Since 1960, three recessions have had overall participation rates lower after 31 months of recovery, three have had them higher and for one there was no change.

That hardly makes this recovery's declining rates of participation unusual.

But the extent of the decline is unusual and is record-setting. Yet the composition of this shift is not so striking. The overall participation rate has fallen by two full percentage points in this cycle compared to a drop of 0.9 percentage points in the previous worst episode in the 1960s. The participation rate of men aged 20 or more is lower by 1.8 pct points, a large drop but not so historically unusual as that rate had fallen by 1.5pct points in 1960 and by 1.3pct points in the 1969 expansion. The participation rate for non teenage women, too, is falling and that is unusual. But the drop is only 0.2 pct points and is close to the 0.1pct point drop in the 1960 expansion. But in every other recovery women's participation rates have risen. The final ingredient is the dropping participation rate for teenagers. The teenage rate has fallen in five of seven expansions. The drop in this cycle is the second worse (with the 2001 expansion being the worst).

Despite the similarity of the decline in participation rates in this cycle with episodes in the past, the overall participation rate decline is larger than ever before. And before we can know if that is significant and a feature of this business cycle we need to look at its component parts. As we suggest above the various pieces have less to offer that is truly record making than does the confluence of their individual events.

When we deconstruct the above participation rate we get the chart below which looks much less severe in this cycle.

What we see here is that several trends have caught up to the economy in this cycle. Since the early 1950s the participation rate of non-teenage men has been declining and doing so steadily. The impact of this on the overall participation rate was hidden and offset by women's participation rates that rose faster than the men's rate fell. As a result the overall participation rate peaked in January 2000, a virtually unnoticed Y2K effect. While we were busy looking for trouble in the nation's and world's capital stock (computers and computer software) we were in fact sowing the seeds of problems with labor.

But as the women's rate participation rate slowed its advance and flattened out, the overall participation rate began to fall. In the 2007 recession's recovery we had only the second recession-recovery since the overall participation rate had been shrinking, although the 1990 recession's expansion came after most of the increase in the participation rate had been achieved. Certainly having less participation, or slower growth in participation in the economy, is one of the things that has held back the recovery of the job market in these three recovery periods from recessions: 1990, 2001, and 2007. All of these have registered unusually weak and delayed recovery period job growth.

There is in the 2007 recovery episode a faster than usual decline the non-teen men's and non-teen women's participation rates. And compared to past cycles both drops are sizeable. But in the case of the women's rate which is the most notable change historically, it stems from the virtual cessation of the women's rate rising around 1996. Technically the women's non-teen participation rate peaked in August 2008 but since the mid-1990s it has only technically been creeping up. The the women's participation rate had hit the 60% mark in mid-1996 and only peaked at 61.1 in August of 2008, twelve years later but now stands at 59.3.

The other notable trend that has driven the participation rates lower is the drop in the always volatile teenage rate. Teenage participation rates peaked in February of 1979 over twenty years ago and have fallen very sharply in each of the last two economic recoveries. With the teenage rate of unemployment over 20%, a lot of teenagers likely are discouraged workers.

The participation rate 'problem' is not a new one but an old one. Blaming some special recession factors for the drop is not very clever and will not lead to a proper solution to stopping the trend decline. Neither is the decline a way to make the economy 'look better.' Having people drop out of the economy makes growth weaker not stronger. The 'window dressing' on unemployment is a short-term charade. Still, the US economy is starting to grow and to produce jobs. There are some true positive forces at work. It would be unwise to ignore these. There is still a chance to reverse some of the ongoing drops in participation rates…as well as good reasons to do so (For these see part 2).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.