The Rise and Fall of Labor Force Participation in the United States

By Bullard, James | Review - Federal Reserve Bank of St. Louis, First Quarter 2014 | Go to article overview

The Rise and Fall of Labor Force Participation in the United States


Bullard, James, Review - Federal Reserve Bank of St. Louis


Labor force participation in the United States has been a controversial subject in current macroeconomic discussions. In this article, I try to offer my own perspectives on the issue.

The participation rate-a measure of the number of people actively involved in labor markets-has generally been a secondary concern in macroeconomics. However, with recent sharp declines following the financial crisis and recession of 2007-09, it has suddenly become a salient topic, and one that gets discussed even in non-economic settings.

At its broadest level, the debate about the labor force participation rate is a debate about the nature of the U.S. economy over the 4V* years since the end of the recession, in the summer of 2009. Should we characterize the economy as substantially back to normal after a very severe recession? Or has little progress really been made, so that the economy remains far from its potential?

There are clear lines of argument on both sides, sometimes blurring political boundaries. Some suggest that the extraordinary policy response since the end of the recession has been largely ineffectual, perhaps citing the very flat employment-to-population ratio since 2009,1 and that their own suggested policy responses would have produced better outcomes. Others emphasize the risk associated with the extraordinary policy response, perhaps citing the Feds now $4.1 trillion balance sheet and the nations relatively high debt-to-gross domestic product (GDP) ratio. Still others argue that the economy has recovered as well as can be expected in the wake of a major financial crisis, perhaps citing a recovery in real consumption expendi tures, an improved housing market, a recovery in equity price valuations, and substantially lower unemployment. This last group might point to the euro area as an example of an economy that has suffered through a double-dip recession over the past several years, eventually leading to unemployment rates exceeding 12 percent, while the United States avoided this fate.

Labor market performance is at the heart of the debate over how to characterize the state of the U.S. economy. While unemployment in the United States was at 10 percent in the fall of 2009 (Figure 1), it has now declined to 6.6 percent according to the latest reading and has generally declined much faster than many forecasters anticipated. In tandem with this rosy development, however, there has been a substantial decline in labor force participation. Some say that the decline in labor force participation is a bad omen for U.S. macroeconomic performance, with labor market dropouts reflecting frustration with the state of the economy. I call this the "bad omen" view. Under this interpretation, the decline in the unemployment rate does not really reflect an improving labor market, and policymakers should look elsewhere to measure labor market outcomes. Others, however, argue that the decline in labor force participation simply reflects changing demographics in the U.S. economy and that different demographic groups have different propensities to participate in market work. As we have different numbers of people in these different demographic groups, we should naturally expect the aggregate labor force participation rate to change. I call this the "demographics" view. Under this inter- pretation, the unemployment rate remains about as good an indicator of overall labor market health as ever, and recent sharp declines in the unemployment rate should indeed be taken as indicative of an improving economy and an improving labor market.

In sum, the bad omen view interprets the recent declines in labor force participation as suggestive of a very weak labor market and discounts the signal coming from recent fasterthan-expected declines in unemployment. The demographics view interprets recent declines in labor force participation as more benign and takes the signal coming from recent faster-thanexpected declines in unemployment at face value. …

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