Measuring The Effect Of The Economy On Labor Force Participation

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By New Deal Democrat

One of the big conundrums during this expansion has been why the labor participation rate has remained so low.

As a refresher, among the entire population aged 16 and over, the Census Bureau divides people into "employed," "unemployed," and "not in the labor force." Among the nearly 100 million people who are "not in the labor force" at all, every month, the Census Bureau asks them if they want a job now. Consistently, month after month and year after year, over 90% of these nearly 100 million people tell the Census Bureau that they *DON'T* want a job now (due to, e.g., being in school or retirement). As of last month, those who are out of the labor force, but want a job now totaled about 5.6 million people. Even in the tech boom of the late 1990s, at least 4.4 million people fit this description:

Last week, I asked "how close are we to full employment?" and answered that it looked like we were about 1.5% away.

But a broader question is, as the economy improves, are people who aren't in the labor force enticed to enter it, by better wages or an easier ability to find a job? That's what I'm looking at this week. Today, I'll set the table with a brief overall look. Later this week, I'll take a look separately at how much improving wages matter, and how much a lower unemployment rate matters.

Let me start by looking at two overall graphs. First, here is the labor force participation rate vs. real wages for the last 50+ years:

Second, here is the labor force participation rate (inverted) vs. the unemployment rate for the last 50+ years. The LFPR is inverted because presumably, we mainly want to see if decreased unemployment is associated with an increase in participation:

There's nothing useful here! The LFPR goes up until the mid-1990s, then sideways, then takes a dive during the "great recession." Meanwhile, the unemployment rate zigzags up and down, and real wages go up, then down from 1974 to 1995, then zigzag up and down and up again.

Part of what is going on is the different long-term trends of men and women in the labor force. The participation rate for men in the labor force has been falling, more or less steadily, since the 1950s. Meanwhile, women entered the workforce by the millions between the 1950s and 1990s, but their participation rate has held steady and then fallen slightly since then. A second more recent issue is the ongoing retirement of the Baby Boomers:

But the big thing to notice for my purposes is that once we separate out men and women, we see that the increasing/decreasing trend for each holds basically steady for decades. In the 60 years since 1955, men's participation has fallen by a little over 18%, or -0.3% per year on average. In the 45 years between 1955 and 2000, women's participation rose by about 25%, or a little over +0.5% per year, before basically leveling out.

Thus, if we look at each year over year and factor in the above long-term trends, then we ought to be able to tease out the cyclical change. Here's what we find for men (participation YoY -0.3%):

and for women (participation YoY +0.5%):

Now we can see that, although it is a little noisy, the labor force participation for both men and women increases compared with trend during economic expansions, and then decrease around recessions.

Armed with this information, in part 2, I'll compare this with real wages. In part 3, I'll compare with unemployment. Finally, in part 4, I'll take a brief look at child care issues and the effect of the retiring Boomers.