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Labor Participation is Up - For a Month, Anyway

  • Blog Post by: Lee Schafer
  • February 7, 2014 - 11:53 AM

One of the most interesting parts of Friday’s job report, beyond the headline of just 113,000 new jobs, is news that the labor force participation rate "edged up to 63.0 percent” and the employment-population ratio increased by 0.2 percentage point to 58.8 percent.

If this is the start of a new trend of greater labor force participation, it would be viewed by economists and policymakers as a really good thing.

There isn’t any particularly good reason, however, to think that the trend of lower labor force participation is reversing.

A Congressional Budget Office report earlier in the week projected that the labor force participation rate would decline to 60.8% by 2024. Also this week, the same office put out a report on the budget with an updated forecast of the impact of the Affordable Care Act on workforce participation, which was viewed by gleeful ACA critics as sharply negative, and that was the report that got all the attention during the week.

The CBO forecasts labor force participation to reach 60.8 percent in a decade, quite a drop from the current 63 percent. And as recently as the early 2000s the labor force participation rate was above 67 percent.

As the report states, “Employment at the end of 2013 was about 6 million jobs short of where it would be if the unemployment rate had returned to its prerecession level and if the participation rate had risen to the level it would have attained without the current cyclical weakness.”

The CBO attributed about half of the decline since 2007 to what economists call “inevitable withdrawal from the labor force,” or when someone gets older and elects to retire.  Think about baby boomers making their exit, a trend that will accelerate in the next decade.

The rest of the change it attributed to continued weakness in the labor market coming out of the past recession, including what it called “unusual aspects of the slow recovery that led workers to become discouraged and permanently drop out.” 

In its look ahead, the CBO cited many more boomers aging out of the workforce as a big factor in declining overall labor force participation, but it also thanks the cyclical weakness in the labor market as a result of the recession and slow recovery will last “throughout the decade.”

Labor force participation is important for a couple of reasons, not least of which is slower economic growth. Having productive people making things and providing service (and spending their good compensation), is sort of what drives economic growth.

But think also of the human tragedy of productive people of working age just giving up and staying at home. Six million workers is a lot of people who could be a whole lot more productive.

© 2014 Star Tribune