A Partial Explanation For Teen Labor Force Participation

As I discovered (see “Why Have Teen Labor Force Participation Rates Declined?”), I found two recent attempts to explain declining labor force participation for teens. The first, in a Bureau of Labor Statistics publication ["Issues in Labor Statistics Series" (http://www.bls.gov/opub/ils/pdf/opbils49.pdf), September 2002], argued that the explanation might be found in rising enrollment rates for teens.

The second, in a "Monthly Economic Outlook" prepared for Raymond James and Associates , Inc., by Scott J. Brown. In the Monthly Economic Outlook" dated April 8, 2004 (http://www.raymondjames.com/pdfs/monit/mnth0404.pdf), suggests that rising unemployment might be an important factor.

(A third possibility is that teens have been increasingly working in the “underground economy,” off the books, being paid in cash, and not reporting themselves as in the labor force or employed. The usual explanation for a growing underground economy is rising marginal tax rates. This does not seem especially plausible for the 2000 – 2004 period.)

Both these hypotheses can be examined statistically. I extracted data on the labor force participation rates for teens, for unemployment rates for teen, and for school enrollment rates for teens from the BLS web site (www.bls.gov) (both genders, all ethnicities, ages 16 – 19). Because the enrollment data is available only in the October Current Population Survey, I had a data set covering the years 1948 – 2003.*

I regressed the October LFPR on the October enrollment rate and current and nine monthly lags (of which only the first, second, fourth, sixth, and ninth were significant) in the unemployment rate. The resulting regression has an R-sq. of 0.655, and, in fact, higher enrollment rates and higher unemployment rates are associated with lower labor force participation. A one percentage point increase in enrollment rates (about a 1.25% increase) seems to be associated with a 0.159 percentage point reduction in labor force participation (about 0.4%).

The results track actual labor force participation pretty well—declining from the late 1940s through the mid-1960s, then rising until about 1980. After 1980, there was a slow, and erratic decline until the 1990s, when the teen labor force participation rate (at least in October) stabilized at around 48 – 50% (both for actual and predicted.And both the actual and predicted LFPR have declined since 2000. Including a couple of earlier years, the following table shows actual and predicted LFPRs for all teens:

…………….Actual……..Predicted
Year………..LFPR………..LFPR
1990………..53.9%.......... 50.7%
1995………..50.4%.......... 49.2%
2000………..49.6%.......... 49.1%
2001………..47.6%.......... 48.6%
2002………..45.6%.......... 47.0%
2003………..42.2%.......... 46.0%

In 1990, 1995, and 2000, the predicted LFPR is less than the actual, but only slightly. But in 2001, 2002, and 2003, the actual LFPR is not only less than predicted, the gap is steadily widening. Since 2000, (October) teen LFPRs have declined by 7.4 percentage points (about 15%). But predicted LFPR has declined (both because enrollment rates have increased and because unemployment rates have also increased) fell much less—by 3.1 percentage points (about 6.5%). And since October 2003, monthly teen LFPRs have been below their year-earlier level by about 1.4 percentage points.

So part of the puzzle of declining teen labor force participation is, in fact, not a puzzle. The recent declines, however, are larger than we would have expected, steeper than in any earlier period since World War II. And they appear to be continuing.

*I discovered, when I looked at the monthly LFPRs over this period that I had, in fact, missed some significant changes over time. For all teens, LFPR declined from a little more than 40% in the late 1940s to a little less than 40% by 1965. This decline was fairly consistent. From 1965 until about 1980, LFPR rose, again fairly consistently, to about 55%, after which if feel to about 50% in 1990, where it stabilized through that decade.