Factors Determining Historical Trends in Labor Force Participation Rates

Labor, along with other factors of production, is important to be understood because the knowledge about its potential contribution of to the GDP helps the economy to prosper and help in the betterment of workers’ welfare. It is necessary to stress the points or factors that affect the changes in labor supply and demand for us to have an idea on how to manage well the human capital resources of a country. Changes in labor force participation may be due to some economic shocks, thus it is fair to discuss labor economics, mechanics to address the possible short-run or even long-run changes.

Let us commence by defining some useful key terms that we will be encountering throughout. Employment rate is the ratio of employment over the total labor force while the unemployment rate is the ratio of the number of unemployed people over the total labor force. Labor force is referred to as the total number of employed and unemployed workers. Employed individuals are those who are currently hiring in a company or government while unemployed individuals are not currently hired but actively looking for a job. Our concern in this paper is to explicate the factors that affect the historical trends in the labor force participation rate (LFPR) which is given by the ratio of labor force over the total working-age population.

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Understanding changes in LFPR is important because it determines the size of the labor force which is a component in constructing measures that will determine the potential GDP of a country and for forecasting GDP growth i.e. the increased participation of married women during the 1970’s and 1980’s expanded the labor force and potential GDP as well. LFPR is also important for assessing the slack and the movements of the labor market. Looking at the unemployment rate alone will not give us a reliable indicator of the labor market conditions. For example, during the end of the 2001 recession to 2005 there was a lag in job creation, but the unemployment rate remained low (at 5.0% in the fourth quarter of 2005). Understanding the participation behavior of workers is important because from the scenario given, there should be other reasons why workers remained in their jobs (Juhn & Potter, 2006, p. 27-28).

It is important that we should know the general labor theories before looking at the provided empirical studies for us to maybe have fundamental ideas that will somehow help us to understand the behavior of such findings. Theories about the indifference of workers between the wages, work hours and leisure times give us a basic idea on how workers react to the changes in their working conditions. Given maximum hours of 24, a worker is torn between how many times he or she is willing to work considering that leisure time will be reduced. The decision is affected by the wages offered to him or her because wage is the price of the work and the compensation for the ‘should-be’ leisure time.

Income is determined by the number of hours he or she dedicates to work multiplied by the wage offer. It is stated that there will be a positive ‘substitution effect’ when wages increase and that there will eventually be a negative ‘income effect’ even when wages increase. The earlier informs us that when wage increases the person will be motivated to work more to earn more income and so his or her leisure time will be lessened (substitution of leisure time to work more to earn more). The latter states that an increase in income due to the progressive increase in wages raises the utility the worker derives from working and if he or she is already contented by the net income, then it is likely for him or her to lessen the number of working hours because the net income increase will anyway offset the impending losses if he or she will reduce work hours.

The microeconomic theories above, give us a hint on how workers evaluate their work because if they feel that there is no need for them to work, then they will not work and thus a minus to the labor force participation rate. But these models are overly simplified because in real life most workers are not bound to choose the number of hours they will only work. Another is that workers do, not only depend on the amount of income they are going to receive because there are other non-monetary factors workers value i.e. age, ethnicity, gender, education, household decisions, passion for work (Smith, 2008). Thus the study of LFPR is exhausting for there are financial and non-financial factors that constrain the labor participation decisions of those in working age population.

In United States the LFPR is estimated by the Bureau of Labor Statistics (BLS) from their periodical surveying called the Current Population Survey (CPS). The technique employed by BLS in estimating LFPR is through using population information on the size of different cohorts or groups. These groups or subgroups are according to gender (male or female group) or age groups (youth, prime-age, retiring). Subgroup information is made with adjustments between census years, accommodating changes due to net migration, deaths, and many others.

On the national level the aggregate LFPR sampling error tends to be low, but sampling error in smaller subgroups can be high. With this, it is advisable to have separate conclusions when analyzing LFPR depending on the study of interest. If a researcher wants to make a conclusion for a specific state, he or she must take into consideration the inapplicability problems when using national level information in analyzing state-level conditions because aggregate conclusions may be very different to that of the smaller unit or subgroup (Juhn & Potter, 2006, p. 29).

LFPR can be decomposed into two categories: changes in population weights for each subgroup and changes in the LFPR of each particular cohort or groups. Changes in population weights are best seen in the aging of the baby-boom group while the increasing number of prime-aged workers (25-54 y.o.) may change the LFPR of this particular group. These prime-aged men and women have higher participation rates than the younger and older groups and they contribute to the increase in the aggregate level participation rates. The aggregate level of LFPR is an overall analysis of participation rates in the national level for it uses total population information coming from different states and years (Juhn & Potter, 2006, p. 29-30).

Figure 1 and 2 (Juhn & Potter, 2006 p. 30) show us the male and female total labor force participation rate by each age group in the United States. This gives us a preview that male overall participation level in decreased while overall female participation level increased in all age groups. The factors that triggered the fluctuations will be discussed one by one below.

Population Increase

Increase in population means additional potential future workers and potential rise in LFPR. Between, 1946’s to 1964’s, there was a ‘baby-boom’ or rampant increase in the number of births in United States, which added millions of people to the population and to the labor force as well. But now that they are nearing retirement age, researchers speculate that LFPR changes may also be due to the impending non-participation of the older baby-boom generation. With the already large and widely expanded businesses, US cannot afford to lose the workers that much. This may be one reason why US and some other European countries with ‘aging population’ allow hire workers from other countries especially from third world countries.

With the rising prices and competitive global market trends, households are challenged to have two or more workers cope up with higher costs of living or to uplift their economic status. The need for higher income for the family and the gradually continuing acceptance of women in different industrial sectors trigger the rising participation of women in labor force However, women have more dilemmas than men because they have children to attend to. Women allocate their working time given other responsibilities and it showed that women with younger children work less hours than those with older or no children at all (Smith, 2008).

Labor Participation of Youths

Younger workers are distinguished into two categories: teenage workers (aged 16 to 19 years) and young adults (20-24 years). In 2005, the LFPR of teenagers hit the lowest record by only 43.7%. Teen participation varies according to their race and ethnicity i.e. 26.0% for Asians, but 46.9% for whites in 2005. Male teens have larger participation declines than female teens among all the races and ethnic groups. There are several reasons why there is a general decline in the participation of young individuals and one of them is the increase in school enrollment. It reflects that youths nowadays are starting to consider education as a help to find satisfying and rewarding jobs in the future.

As evidence, BLS statistics showed that in 2000 to 2005 the teen school enrollment rate rose by 5.6%, from 76.9% to 82.5%. In the same period, LFPR of enrolled teens declined by 6.7%, from 43.0% to 36.3%. However, it is uncertain that only the rise in school enrollment caused the LFPR of youths to shrink because the participation of out-of-school teens also declined. The overall decline in LFPR of teens includes some other factors like a personal choice, lack of motivation, rising family incomes and competition for jobs (Mosisa; Hipple, 2006, p. 38-39). Rising family incomes do not drive teens to work for their parents can sustain a decent living.  Personal choice may include the disheartening of teens because of young age and inexperience.

Teens are not only competing with their fellow youths because during recession periods, some elders stepped down to the jobs that are supposed to be done by teens i.e. gasoline boy/girl. Desperation and negative speculations drive elders to grab any job than to have no job at all. In return, employers are to hire older and experienced workers than young and inexperienced teens. Teens also face competition with older foreign-born workers with lower-levels of education. Over the 2000 to 2005 period, LFPR of youths declined while the rate of 25 years and older foreign-born individuals increased. This is one example of the harm of immigration to the welfare of the native people (Mosisa ; Hipple, 2006, p. 38-39).

Young adults on the other hand, are most likely to have finished their education that is why numbers tell us that their enrollment rate is lower than of the younger age group (teens). Like with the teens there is also a decline of LFPR in this age group because some have difficulty in finding jobs. But unlike teens, young men’s participation is relatively higher than of the women because some young women take care of their young children. Even so, the gap of young men and women’s LFPR over the past century is narrowing, one indication of increasing women pro-active in the labor market and decline in the participation of men.

At all levels of educational attainment, LFPR of young men who were not enrolled (probably high-school dropouts) is still higher than that of young women, but as the two genders achieve higher educational attainment the narrower the gap of participation will be. Less educated young adults also face threats from both younger and older foreign-born workers (Mosisa; Hipple, 2006, p. 39-42).

Labor Force Participation of Adults

Adult Women (25 to 54 years).   The LFPR of women in this age group grew steadily after the World War II, but the pace of increase varied and the largest increase occurred in 1970’s with 13.9% and followed by 1980’s with 10.0%. The increase continued and reached its peak of 76.8% in 1999, however, the participation rate flattened out after the climax. By 2005, LFPR began to recede slightly to 75.3%, but still higher than those of the ‘70s, ‘80s, and ‘90s. As shown in Table 1, on the average, there is an increase in the participation rate level of ages 24 to 54.

The decision to participate of mothers is dependent on their educational attainment and presence and age of children. From 1994 to 2005, the LFPR of married mothers with higher levels of education declined by 3.2%. This drop is relatively higher than for those with some college and no college (2.6% and 2.8% respectively). The significant drop in participation of well-educated, married mothers are mainly pronounced by mothers with preschool children. From 1999 to 2005, the LFPR of unmarried women with children under 18 years increased by 8.8% (Mosisa; Hipple, 2006, p. 42-47).

Adult Men (25 to 54 years).   For the past 50 years, it has been a surprise that the participation rate of men in this group has declined. During the 1950’s the participation rate for men is 97.4% and this rate has undergone steady decreases year by year until it reached 90.5% in 2005. Men 50 to 54 years age subgroup are less likely to participate than the other age groups because of aging and pension available for them. Regardless of the ethnicity and education, adult men’s participation still decreased. The Black men rate fell by 7.0% since 1973 compared with the 3.9% fall in participation of the whites.

As expected, men with higher educational attainment are more likely to stay and participate in the labor force. The largest decline since 1970 was among with lesser education (less than high school to some college because jobs for less educated adult men became undesirable and the demand for less-skilled workers declined thus the wages offered to them is low. In turn, there were lesser opportunities for less-educated men and the participation of this subgroup did decline. This supports the microeconomic theory of wage as a factor in the labor participation decision. The enacted Social Security Disability in 1956 also contributed to the fall of adult men’s participation for some of them depend on its benefits. The rise of beneficiaries from 2.9 million to 6.2 million coincides with the fall of participation of adult men (Mosisa; Hipple, 2006, p. 47-49).

Retiring Old Workers

Older workers (55 and above years old) have tended to retire at earlier ages. Figure 2 above shows that LFPR among older men stabilized during the late 1980s and early 1990s. The long decline in participation rates of older men is due to the implementation of Social Security, rise in income which makes savings for retirement easier and the rise of attractive retirement lifestyles (Costa, 1998). However, a number of other studies concluded that the impact of Social Security and pension plans account only a minimal effect on the decline of men’s participation. Table 5 (Juhn ; Potter, 2006, p. 40-41) shows that the LFPR of 1911-1915 and 1916-1920 birth cohorts fell sharply. Men born in those cohorts are nearing or have already reached retiring age during the 1970s; the time when Social Security benefits are shooting up rapidly.

The participation of 60-64 years old men with higher retirement income fell about 6.4% compared with the cohorts born five years earlier from them. However, the Social Security has insignificant effects on the participation of birth cohort 1916-1920 because at that time, the security act was amended and the benefits were reduced. The cohort born after 1936 (who reached 65 by 2001) has increased LFPR relative to the previous cohort because there was a movement from defined-benefit to defined-contribution plans. Since defined-contribution plans continue to increase retirement benefits and assets regardless of age, more workers choose to stay working to increase future pension assistance. Other workers also delay retirement to still enjoy their employer’s sponsored health insurances until they will be 65 and be eligible for Medicare (Juhn ; Potter, 2006, p. 39-41).

Overall the labor force participation rate in US has declined after the study increases for the past few decades. Young adult participation also declined but not as much as of the teenagers which has the largest participation rate drop. High school dropouts especially young women with children are most likely not to be working neither looking for work. Adult women’s participation steadily increased over the past five decades, but is decreasing in recent years. Women of younger cohort (25-29 years) registered the largest decrease in participation rate among other adult women cohorts.

The decrease in LFPR of mothers with higher education is higher than those mothers with less education. Most of these well-educated, married mothers who choose to stay home rather than work are those with young children to take care. On the other hand, the LFPR of adult men consistently fell down between 1950 and 1990 and since 1990 the decline rate is at its largest. During the last quarter century, less educated men are more likely to not participate in the labor force than those who are well-educated.

Indeed, labor study is exhausting, but is essential in determining the reasons why citizens are working or not. Government must realize the nature and encouragement of workers to motivate them to participate in the labor force. Employment is very important because aside from machineries, there are still industries that need human capital vastly. In return, labor contributes to the betterment of the industry and the economy as well.

References

  1. Costa, D.L. (1998). The Evolution of Retirement: An American Economic History: 1880–1990. Chicago: The University of Chicago Press.
  2. Clark, T.E., Nakata T. (2006). The Trend Growth Rate of Employment: Past, Present, and Future. Economic Review, First Quarter 2006, 43-85.
  3. Juhn, C., Potter, S. (2006). Changes in Labor Force Participation in the United States. Journal of Economic Perspectives, 20, 27-46.
  4. Mosisa, A., Hipple, S. (2006). Trends in labor force participation in the United States. Monthly Labor Review, October 2006, 35-57.
  5. Smith, S. (2008). Labour Economics: Lecture 2: Labour Supply Theory and Policy [a Powerpoint lecture presentation] delivered for EC3006N at London Metropolitan  University.

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Factors Determining Historical Trends in Labor Force Participation Rates. (2016, Dec 21). Retrieved from https://graduateway.com/factors-determining-historical-trends-in-labor-force-participation-rates/