Academic journal article Monthly Labor Review

A Behavioral Model for Projecting the Labor Force Participation Rate

Academic journal article Monthly Labor Review

A Behavioral Model for Projecting the Labor Force Participation Rate

Article excerpt

Various factors, including economic cycles, wages, school enrollment, and marital status, affect the participation of different groups of workers in the labor force; a behavioral model that accounts for these variables yields results similar to those obtained from the current BLS model used to project the labor force participation rate

Economic growth depends primarily on changes in two factors: the growth of the labor force and changes in labor force productivity. The entry of large numbers of baby boomers into the U.S. labor market, coupled with the rapid increase in women's labor force participation rates during the 1970s and 1980s, resulted in a sizable increase in the supply of the labor force and contributed considerably to the economic growth of that period. Consequently, of the 3.2-percent annual rate of growth of gross domestic product (GDP) over that period, 2.5 percent was attributable to labor force growth and 0.7 percent resulted from changes in labor productivity. (1) Growth in labor productivity, however, has been considerably greater since then. During the 1991-2001 period, out of the 3.1-percent annual growth of GDP, 1.2 percent was the result of labor force growth and the remaining 1.9 percent was attributable to rising productivity growth. More recently, out of the 2.7-percent growth of GDP over the 2002-09 timeframe, the labor force grew at a rate of 1.0 percent while productivity growth was 1.7 percent. (2) Because the growth of the labor supply has such a significant impact on economic growth, projecting the size and composition of the labor force is a major task in macroeconomic forecasting.

The Bureau of Labor Statistics (BLS, the Bureau) publishes medium-term, or 10-year, labor force projections every 2 years. The Bureau takes a long-term view by assuming a long-run full-employment economy in which unemployment is frictional and not a consequence of deficient demand.3 The projected labor supply in the BLS model is a product of two factors: the size and growth of the population, by age, gender, race, and ethnicity; and the future trend of labor force participation rates--that is, the percentages of the civilian noninstitutional population in various age, gender, race, and ethnic groups that are in the labor force.

By definition, labor force participation is a binary variable: an individual is either in the labor force or not in the labor force. That definition does not require a minimum number of hours of work for someone to be a participant in the labor force.

The BLS labor force projections are based on the U.S. Census Bureau's projections of the U.S. resident population. The population projections use alternative assumptions about three main factors that affect population growth: fertility, life expectancy, and net international migration. In the past, the Bureau of Labor Statistics has used the "middle series" population projection, which assumes mid-level values for the three factors and is considered by the Census Bureau to be the most likely path of future population change. (4)

In the first stage of the labor force projection process, the concept of the resident population is converted to that of the civilian noninstitutional population. The conversion takes place in four steps. First, children under 16 years are taken out of the total resident population. Second, the Armed Forces, broken down into different age, gender, race, and ethnic categories, are eliminated from totals in order to estimate the civilian population. Third, the institutional population is subtracted from the civilian population to estimate the civilian noninstitutional population. (5) Finally, the civilian noninstitutional population is benchmarked to the most recent annual average data for that population from the Current Population Survey (CPS). (6) The 2006-16 BLS labor force projection model has utilized the CPS participation rate series from 1970 to 2006 for 136 age, gender, race, and ethnic groups. …

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