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Monday, October 18, 2004

The Declining LFPR

We’ve seen that the recent apparent improvement in the labor market situation (as shown by the decline in the unemployment rate in the household survey) is mostly a consequence of a declining labor force participation rate. There’s an obvious question: What accounts for the decline in the LFPR? There are several possible answers.

First, it might be that enough households find themselves enough better off that they can achieve their desired income levels with only one person working. This does not, however, appear to be consistent with the data on median household and on real earnings.

Second, it might be that the aging of the population has led to a lower overall LFPR as a larger percentage of the population is now in age groups with historically low LFPRs. There’s probably some truth to this, but there is also an awkward fact. If LFPRs had remained unchanged since 2000, the growing fraction of the population age 55 and over would have pushed the overall LFPR down by about 0.1 percentage points (of a total 1 percentage point decline. The awkward fact is that LFPRs of older workers have been rising since 2000 (for the 55-64 age group, up from 56.7% in 1994, to 59.3% in 2000 to 62.1% in 2004; for the 65 and over group, up from 12.5% in 1994 to 13.1% in 2000 to 14.8% in 2004; LFPRs for September of each year). Taking this into account, we would expect an increase of 0.1 percentage points in the overall LFPR.

There is another demographic explanation however. Labor force participation of teenagers (ages 16 – 19) have declined. A lot. Look at the following table (LFPRs for September in each year).

Year…..16-19 White…..Black….Asian…..Hispanic

For purposes of historical perspective, the labor force participation rate of teens was 51.5% in September 1948, fell to 45.5% by 1964, rose erratically to 57.8% in 1978, then declined to and stabilized in the low-50s, where it remained until 2000. Since then, the teenage LFPR has declined by 8 percentage points in 4 years. As of September, it was at its lowest level in the 1948 – 2004 period, about 2 percentage points below the previous low.

The decline in teen LFPRs accounts for nearly 80% (0.8 percentage points of the 1 percentage point decline) in the overall LFPR since 2000. And, of course, it raises another question—why has labor force participation of teens declined, so much, so quickly?


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