Academic journal article Economic Perspectives

The Decline in Teen Labor Force Participation

Academic journal article Economic Perspectives

The Decline in Teen Labor Force Participation

Article excerpt

Introduction and summary

By the middle of 2005, the U.S. civilian unemployment rate had fallen to 5 percent, a level many analysts consider consistent with essentially full employment. However, individuals who have become discouraged over their prospects of finding suitable employment and, as a result, have given up looking are not counted among the unemployed. Thus. analysts often look to the labor force participation (LFP) rate, the fraction of the population that is either employed or unemployed as an additional indicator of labor market conditions. In fact, the participation rate declined significantly during and after the 2001 recession and remains well below its 2000 level. This could imply more labor market slack than the unemployment rate suggests.

The decline in LFP has been especially great for teenagers. As figure 1 shows, teens' participation rates had been trending down since the late 1970s. However, from 2000 to 2003, teen LFP fell a stunning 7.5 percentage points, compared with a decline in the overall rate of only 0.6 percentage points. Currently, the LFP for teenage boys is the lowest since at least 1948 and for teenage girls is the lowest since the early 1970s.

Figure 1 also shows that the decline since 2000 in the LFP rate for those 20 and older is considerably less dramatic than the fall in the overall rate, which includes those aged 16 to 19. Although those between the ages of 16 and 19 represent only 4.2 percent of employment (and 8.2 percent of population aged 16 to 69), they account for over half of the fall in aggregate LFP since 2000. Strikingly, 16 year olds to 17 year olds, who account for only 1.6 percent of workers and 4.3 percent of the population aged 16 to 69, explain over one-third of the fall in aggregate participation since 2000. Thus, a better understanding of the forces shaping the labor force participation of teens may shed significant light on recent trends in overall participation.

Another reason to look more closely at teen labor force participation is to understand what this major shift in the allocation of young people's time may mean for future productivity. The answer to this question likely depends on what teens are doing instead of working and whether those activities contribute to human capital development. On the one hand, if the reduction in time spent working in the market has been accompanied by a concomitant increase in the time spent in school or doing homework, one might reasonably expect an eventual increase in productivity consistent with the well-documented returns to education. (1) The impact of the increase in schooling investments on the overall economy might also include the positive externalities associated with education, including spillover productivity effects on peers and other workers, lower crime, and greater civil involvement in the public policy process. (2)

On the other hand, a shift in teens' time allocation from market work to leisure or other activities that do not increase their human capital may negatively affect their future productivity. In general, labor market experience tends to raise subsequent earnings. Moreover, it is easy to imagine that moderate amounts of time devoted to a part-time job during the summer or while in school might inculcate good work habits and allow young people to make more informed educational and career choices. (3)

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In this article, we examine the facts about teen labor force participation in more detail. We show that, although there is some variation in the magnitude, the decline in teens' labor force participation is extremely widespread. Virtually all groups of teens have seen a decline in LFP. We then discuss a number of possible explanations for this decline in teen labor force participation over the past quarter century as well as the sharper drop of the early 2000s. The possible explanations that we consider can be grouped into two categories: demand and supply. …

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