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The Decline in the U.S. Labor Force Participation Rate

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Abstract

After peaking around the year 2000, the Labor Force Participation Rate (LFPR) of Americans declined substantially, falling faster after the financial crisis of 2007. Since 2015, the LFPR has remained at its lowest in four decades. In this paper, we produce a comprehensive review of the literature investigating the causes of the recent decline in LFPR. We include works from the academic literature as well as the gray literature from research institutes and labor market experts, and published and unpublished studies. The literature reviewed signals multiple causes behind this decline. The research on the extent to which the Great Recession had caused the decline establishes that most of it cannot be attributed to cyclical factors. Additionally, the literature examines the relative importance of trend factors, such as long-running demographic patterns, which explain at least part of the decline. The review includes articles that aim to quantify the impact of one or more factors through statistical or econometric analysis or economic modeling. Demographic trends, like the aging of the Baby Boom Generation, explain a large portion of the decline. The rest of the decline can be attributed to factors that affect the participation rates of specific subpopulations, such as technological innovations and trade, as well as to changes in social programs, such as Social Security Disability Insurance. Some subpopulation trends are clear, but their ultimate causes are not fully understood, as is the case for female and youth LFPRs. We list these factors and point to important areas for future research.

Key Findings

  • The literature assessing the cyclical component of LFP in light of the Great Recession of 2007 concluded that most of the recent decline in LFP cannot be explained by a cyclical component.
  • The consensus in the literature is that demographic trends such as population aging are important in explaining the persistent decline in LFPR, which has taken place since 2000, but they do not account for the full decline. At least half of the decline in LFPR can be accounted by demographic trends alone
  • A large body of literature has found that social and welfare programs affect LFP. But these effects are different by subpopulation: The research reviewed concludes that changes in Social Security benefit claiming rules increased the LFP of older workers, changes in the rules of the Social Security Disability Insurance program reduced labor supply of program applicants, and changes in welfare programs increased the labor supply of low-income, single mothers while they reduced the labor supply of young, low-skilled men.
  • The research has not reached full consensus on the impact of several other factors, either because there is no consensus on the effect, or because the aggregate impact has not been studied. Examples of these factors are technological progress, the opioids crisis, and international trade.
  • More research is needed to understand the LFP behavior of two large groups: prime-age women and young men. There is no consensus in this literature, but several factors have been analyzed including: improved, leisure-enhancing technologies, increased school enrollment, low wages for the less-skilled.

Citation

Perez-Arce, Francisco, Maria J. Prados, and Tarra Kohli. 2018. "The Decline in the Labor Force Participation Rate in the United States," University of Michigan Retirement Research Center (MRRC) Working Paper, WP 2018-385. Ann Arbor, MI. http://mrrc.isr.umich.edu/publications/papers/pdf/wp385.pdf

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Project

Paper ID

WP 2018-385

Publication Type

Working Paper

Publication Year

2018