You Decide: What’s Behind the Declining Labor Force

Labor Force

Dr. Mike Walden
North Carolina Cooperative Extension

Mike Walden
Mike Walden

In our modern technology-driven world, one of the things we don’t lack for is information. In fact, some say we are now overburdened with too much information. Indeed, entire books have been written discussing how people can cope with information overload.

As a professional economist, I have to admit my profession is part of the problem. We love economic statistics, and with new ones released almost daily, there’s no shortage of these numbers.

Among all the economic data coming from various media outlets, one has received increased attention in recent years. In fact, I give this number top prize for most discussed economic statistic of the past couple of years.

And what is this digital darling? It’s the labor force participation rate, or LFPR for short. It’s actually a simple statistic, measuring the percentage of adults – usually defined as those 16 years of age and older – who either have a job or are looking for work.

Why has the LFPR received the equivalent of rock-star status for those avidly following the economy? Because unlike most economic values that rise and fall with the condition of the economy, the LFPR has displayed a fairly consistent trend during the last 20 years, and this trend has been down. In other words, as a percent of our adult population, fewer people are working or are looking for work.

Let me give you some numbers (sorry, it’s an occupational hazard!) to show what’s been happening to LFPR. After World War II the LFPR stood at 58 percent. By the mid-1990s it was almost 68 percent, a 10-percentage-point jump in 50 years. This was an amazing gain, fueled, in part, by a growing economy and the movement of many women into the paid labor force.

But the reverse in the LFPR in the last 20 years has been just as significant – maybe more so. The LFPR has dropped five percentage points, meaning half the earlier gain was given up in less than half the time. The LFPR is now at its lowest level in 30 years. Also, in case you are wondering, we’ve seen the same trends for the LFPR in North Carolina.

Obviously, the decline in the LFPR raises many questions, but I think three of them dominate: First, why has the LFPR declined? Second, should we be concerned about the LFPR’s plunge?

Third, what changes or policies could be instituted to increase the LFPR?

There’s good news and bad news explaining the LFPR’s drop. The good news is that several factors behind the decline are not necessarily worrisome. We’re an aging society with thousands of workers retiring every day. At the other end of the age spectrum, more young people are going to college and thus staying in school longer before they work. In addition, there’s some indication more young mothers may be delaying entering the labor force until their children are older. All of these factors would combine to reduce the LFPR.

But research shows these factors combined account for only about half the story behind the reduction in the LFPR, and here’s where the worry begins. The focus of the concern seems to be on men. The male LFPR has been continuously declining since the 1950s, and recently the drop has accelerated. The movement of men out of the labor force has been particularly large for young single men who have not pursued formal training beyond high school. The explanation is this is precisely the demographic group that has been most adversely impacted by the reduction in manufacturing jobs, the implosion in the construction industry and the rise of machinery and technology replacing human labor in some occupations.

So what’s the answer to turning around the LFPR? Before I answer, let me stress that we should only be concerned with part of the drop in the LFPR. The parts due to young people staying in school longer, older workers retiring, and families making decisions about child rearing aren’t necessarily bad.

Two simple conditions must be met to increase the number of people working. We must have businesses wanting to hire workers, and we must have people wanting to work. To increase the LFPR, both sides of the equation should be addressed.

Businesses will hire more workers if they receive a net benefit from the labor. This means the value the business obtains from workers – in terms of increased production or sales or improved efficiency – has to exceed the cost of the labor.

Many individuals aren’t working today because they don’t have skills businesses want. And while education is certainly emphasized in our society, there are many people – particularly young people – who haven’t found their occupational passion. Expanding vocational and technical training options in high schools and increasing apprenticeship collaborations with businesses are two ways to introduce the young to work options.

To increase the attractiveness of work, public policy should make sure work always pays for the worker. In particular, for lower-earning workers this means social safety net support should only gradually be removed as the worker’s earnings rise. Indeed, a recent study showed lower-earning workers trying to move up the income ladder often lose more than a dollar of public support for every dollar of new earnings. This reduces the incentive to work.

Among all the hundreds of economic statistics available, the labor force participation rate may be one of the most telling and comprehensive. It reflects demographic, social and economic trends in one number. So if you’re short on time, this may be THE one economic statistic you decide to follow!

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Dr. Mike Walden is a William Neal Reynolds Distinguished Professor and North Carolina Cooperative Extension economist in the Department of Agricultural and Resource Economics of North Carolina State University’s College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy. The College of Agriculture and Life Sciences communications unit provides his You Decide column every two weeks.

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