Going to School on Labor Force Participation
Atlanta Fed’s macroblog, April 11, 2017
In the aftermath of the Great Recession, labor force attachment declined. However, that pattern has been reversing itself lately. In particular, the labor force participation rate (LFPR) of the prime-age (25 to 54 years old) population, the core segment of the workforce, has been moving higher since late 2015. While this is good news, the prime-age LFPR remains well below prerecession levels, meaning that there are more than two million fewer prime-age people participating in the labor force. What factors have contributed to that decline? Where did those people go?
The Atlanta Fed LFP dynamics web page has an interactive tool that allows users to drill down into the drivers of the change in LFPR. The tool breaks the change in LFPR into two parts. The first part is the effect of shifts in the share of the population in different age groups (we use five-year age groups). The second part is the change attributable to shifts in the rate of nonparticipation. Using a methodology described here, we can drill deeper into the second part to learn more about the reasons for not participating in the labor force.
The U.S. Census Bureau will make the first quarter 2017 microdata on the reasons for nonparticipation available in a few weeks, so the following chart shows a decomposition of the 1.8 percentage point decline in the prime-age LFPR (not seasonally adjusted) between the fourth quarters of 2007 and 2016.
In this chart, “residual” pertains to the part of the total change in the LFPR that is attributable to the simultaneous shifts in both age-group population shares and age-group participation rates. In the present case, the residual is zero.
Because we are examining changes in prime-age participation, and all age groups within prime-age have reasonably similar participation rates, a change in the composition of ages tends to have little impact on the overall prime-age LFPR. Instead, the decline is due to shifts in the nonparticipation rate within age groups (the orange bar). In particular, the decline could indicate an increased likelihood of being in school, having family responsibilities that prevent participation, being in the shadow labor force (wanting a job but not actively looking), and a disability or poor health.
Although all these factors put downward pressure on participation, an important countervailing influence is that the education level of the population has been rising over time, and participation tends to increase with more education. In 2007, 41.0 percent of the prime-age population had a college degree, and they had an 88.3 percent participation rate versus 79.5 percent participation for those without a degree. By the end of 2016, the fraction with a degree had increased to 47.3 percent, and that cohort’s participation rate had declined 1 percentage point, to 87.3 percent, versus a drop of 3.5 percentage points, to 76.0 percent, for those without a degree.
To see the importance of rising education on participation, the following chart shows the decomposition of the 1.8 percentage point decline in prime-age LFPR based on education-group population shares (degree and nondegree) instead of age-group shares.
In this chart, “residual” indicates the part of the total change in LFPR due to the simultaneous shifts in both education-group population shares and education-group participation rates.
As the chart shows, the shift in the education distribution of the prime-age population from 2007 to 2016 by itself would have increased the prime-age participation rate by about 0.7 percentage points (the green bar). Conversely, if education levels had not increased then the participation rate would have decreased by even more than it actually did. The nonparticipation effect would be larger for most nonparticipation reasons and especially for reasons of disability or poor health (−0.8 percentage points versus −0.5 percentage points). See the charts and analysis in the “health problems” section of the Labor Force Dynamics web page for more information on health-related nonparticipation by education.
Despite some partial reversal over the last year and a half, the prime-age LFPR is still lower than it had been prior to the recession. However, the decline in participation could have been even larger if the education level of the population had not also increased. Rising education is associated with a lower incidence of nonparticipation than otherwise would be the case, and it’s principally associated with less nonparticipation attributable to disability or poor health. While researchers agree on the positive association between education and health, pinning down the specific reasons for this remains somewhat elusive. Factors such as income, informational, and occupational differences—as well as public policy choices—all play a role. Recent research by Nobel laureate Angus Deaton and Anne Case suggests that both education and racial differences are important considerations—emphasizing the sharply rising incidence of health problems among middle-age, white families with lower levels of education—and this Washington Post article highlights rising disability rates in rural America.