Cyclical and Long-Term Labor Force Participation Rate Changes by Gender, Age, and Education

There's been a lot of interest in labor force participation rates and in explaining why they are declining relative to historical, though there has been some increase recently. The Dallas Fed takes a look at this issue and separates changes in participation into cyclical and long-term factors for individuals grouped by gender, age, and education. Note that tables 1 and 2 referenced in the text were too big to include:

Opting Out of Work: What’s Behind the Decline in Labor Force Participation?, by Helen McEwen, Pia Orrenius, and Mark Wynne, Federal Reserve Bank of Dallas, Southwest Economy, Issue 6, November/December 2005: The labor force participation rate ... has been declining in the United States in recent years. ... Barring other changes, a decline in the share of the population that is economically active translates into a lower rate of economic growth. Another worry is whether more-vulnerable groups are participating disproportionately in the decline. For middle- and high-income families, less attachment to the labor force may simply reflect a change in priorities or increasing wealth and may not have adverse consequences. For low-income families ... dropping out of the labor force can bring about financial distress, lower future earnings and a greater dependence on welfare programs. ...  We focus on how gender, age and education groups have fared in the recent past and discuss the role of cyclical variation versus long-term trends in participation among these groups.

The Recent Decline in Labor Force Participation
Chart 1 illustrates the recent decline in the labor force participation rate. The rate fell from its peak of 67.3 percent in first quarter 2000 to a low of 65.8 percent in first quarter 2005. Since then, participation has risen slightly, reaching 66.2 percent in the third quarter. ...

Table 1 breaks down this change in the overall labor force participation rate for gender, age and education categories. ... The total change is decomposed into two parts: (1) the difference in labor force participation that is due to an increase or decrease in the group’s share of the adult population, and (2) the difference due to a change in the group’s propensity to participate in the labor force. ...

Cyclical Factors by Group

Both cyclical (temporary) and long-term (permanent) factors influence the changes in labor force participation rates illustrated in Table 1. First, let us consider the cyclical component. ... To better illustrate each group’s sensitivity to the business cycle, Table 2 shows simple correlations of quarterly real gross domestic product (GDP) with leads and lags of the labor force participation rate. ...  While employment is typically a coincident indicator, meaning it changes simultaneously with economic output, the unemployment rate is a lagging indicator, meaning it changes after output has changed. Given that labor force participation is a combination of employment and unemployment, we would expect it to be a slightly lagging indicator. ...

As seen in Table 2, workers who traditionally have had less attachment to the labor force—women, young workers, older workers and high school dropouts—have more volatile labor force participation in general. ... Table 2 ... suggests that participation rates are pro-cyclical—positively correlated with economic output—and that the strongest correlation for males and females is between GDP today and participation two and three quarters from today... Among the age groups, the highest correlations with economic output are among the young and prime-age workers. Interestingly, the participation behavior of older workers is essentially uncorrelated with GDP ... This suggests that structural or long-term factors, rather than cyclical or temporary changes, drive the work decisions of older people. ...

Participation by Age. Chart 2 shows labor force participation rates by age group since 1948. Declining participation rates among youth is a long-term trend, ongoing since the late 1980s. The decline has seemingly intensified in and around recession years, in 1990 and again post-2000, for example. The opposite trend holds for mature workers. .... Prime-age workers (ages 25 to 54) ... have experienced a leveling off in rates. ...

Some of the drop in youth participation stems from a decline in the share of students who work. Chart 3 shows how the drop-off in participation among youth who are enrolled in school began earlier and is much steeper than among youth who are not enrolled in school. Compounding the effect of this sharp decline in participation rates among students is an increase in the share of 16- to 24-year-olds who are students. Between 1985 and 2004, the share of 16- to 24-year-olds enrolled in school jumped from 36 percent to 51 percent.

Another striking change in Chart 2 is the upturn in market participation among the 55 and over group. The increase followed almost a decade of flat participation rates among this group. What caused it? Research suggests that the rise in the labor force participation rate of older workers is due to a combination of factors. These include longer-term changes such as healthier and longer life spans, the decline in defined-benefit pension plans, changes to Social Security benefit rules, and the increased cost of health care. ...

The decline in defined-benefit plans and rise in defined-contribution plans are also contributing to keeping older workers in the labor force. ... As Chart 4 shows, the share of workers covered by defined-benefit plans has been falling, while the incidence of defined-contribution plans, such as 401(k) plans, has been rising...

In addition, several changes to Social Security encourage the elderly to work longer. ... The need to cover higher out-of-pocket medical expenses and the desire for employer-based health insurance are two important factors tying older workers to the labor force to a greater extent than in the past.[8]

Participation by Gender. Long-run changes in the prime-age population’s participation behavior have been primarily driven by dramatic changes in female labor force participation since the 1950s. ... [a]s Chart 5 illustrates...

The recent downturn in women’s labor force participation rate has surprised many. ... More than anything else, ... research seems to point to “unexplained factors” driving down female labor force participation in recent years. In other words, this phenomenon is not well understood.

Participation by Education Level. One concern with falling participation rates is that the trend may reflect reduced job market opportunity for vulnerable workers, such as those with lower education levels and hence, lower incomes and less wealth. The evidence does not seem consistent with an exodus of the least-skilled workers from the labor force (Chart 6 ). In fact, labor force participation rates have risen among individuals ages 25 to 64 who lack a high school diploma—from 58.3 percent in 1994 to 63.2 percent in 2004. All other education groups have experienced declines...

Conclusion

Over the past half century or so, labor force participation rates have tended to be pro-cyclical, with a slight lag. That is, labor force participation tends to increase following increases in economic activity. However, when we look at the cyclical behavior of participation rates by gender, age group and educational attainment, we see noticeable differences. For example, the participation rates of men tend to be less volatile and more pro-cyclical than the participation rates of women. Likewise, the participation rates of the young tend to be more volatile and pro-cyclical than those of the elderly.

Cyclical movements in participation rates occur against a backdrop of longer term trends. ... As more women have entered the labor force, men have tended to leave, with the net effect being that participation rates for prime-age workers have been rising for the past several decades, albeit at a slower rate over time. More recently, these increases have ceased altogether. Outside of the prime-age groups, participation rates have displayed different trends in recent decades, with younger workers dropping out of the labor force and older workers joining it. ... driven by longer term forces. Likely candidates are increased life expectancy and changes in pension arrangements