Lower Labor Force Participation Doesn’t Tell the Whole Economic Story

Posted January 14, 2015 at 1:43pm

Republicans who are looking for numbers to bolster their case for conservative economic initiatives point most frequently to the rate at which Americans participate in the labor forces, which is partly responsible for the steep decline in the unemployment rate over the past three years.

“We’ve got the lowest labor participation rate in years,” House Budget Chairman Tom Price, R-Ga., said after the December jobs numbers were released this month. “This economy isn’t rolling yet.”

Indeed, the most recent Bureau of Labor Statistics report shows that labor force participation stood at 62.7 percent, the lowest level since 1978, and well below a rate of about 66 percent before the financial meltdown. But the headline number doesn’t entirely tell the story.

A Congressional Budget Office study last February attributed half of the roughly 3-point decline between 2007 and 2013 to long-term trends beyond the direction of the economy, “primarily the aging of the population.” That demographic trend is largely the aging of the baby boom generation, and it includes in part those workers over the age of 50 who took buyouts in the rapid business retrenchment that took place after the 2008 financial crisis.

Only about half a point of the decline, the CBO said, was the result of the “unusual aspects of the slow recovery that led workers to become discouraged and permanently drop out of the work force.”

The lower participation rate is a concern: It means fewer workers are paying payroll taxes, for instance, and leaves economic output below its potential. But the CBO expects the demographic trends will continue to drag down the participation rate for some time to come. “The aging of the population will further reduce labor force participation during the coming decade, and the longer-lasting effects of the recession and slow recovery on unemployment and the size of the labor force will continue, albeit with diminishing magnitude, throughout the decade,” the CBO wrote.

John J. Pitney Jr., a politics professor at Claremont McKenna College, said Republicans will have to look past the numbers to make their case.

“If you use abstract terms, that doesn’t resonate,” he said. “You need to talk about people who are so discouraged they have given up. There are plenty of anecdotes to keep it going.”

And the non-partisan agency of Congress could be wrong in its projections, of course. The same report said the unemployment rate would fall to 5.8 percent by 2017 and slip slowly to 5.5 percent by 2024. The December jobs report put the unemployment rate at 5.6 percent.