A Meta-Analysis of the Decline in the Labor Force Participation Rate

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Abstract

This project explores the causes behind the recent decline in the Labor Force Participation (LFP) rate. The analysis examines the evolution of the LFP rate for different demographic groups to gauge the effect of demographic changes. An integral part of the project is an investigation of the flows of workers into and out of the labor force to determine whether the LFP rate has been declining because more workers are leaving or because fewer workers are entering the labor market. The project also studies the evolution of wages and finds that the decline in the LFP rate is often accompanied by a declining real wage, which is indicative of the relative importance of demand versus supply factors.

Key Findings

  • While roughly half of the decline in labor force participation since 2000 can be attributed to demographic shifts, participation within groups has continuously declined as well.
  • Young workers in particular have been both less likely to enter the labor force and more likely to leave.
  • Across the age spectrum, disability seems to be an increasingly common factor limiting work.
  • Between and across demographic groups, we find evidence of covariation between wages and labor force participation consistent with lagging wage growth discouraging workers from seeking employment.
  • The association between wages and continued employment has been growing, suggesting increasing incentives to remain employed, but decreasing incentives to return to employment for those out of a job.
  • So overall, much of the decline in labor force participation may be related to the wage incentives associated with participation and entry in particular.

Citation

Seshadri, Ananth. 2018. “A Meta-Analysis of the Decline in the Labor Force Participation Rate.” Ann Arbor MI: University of Michigan Retirement Research Center (MRRC) Working Paper, WP 2018-381. http://www.mrrc.isr.umich.edu/publications/papers/pdf/wp381.pdf/

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Project

Paper ID

WP 2018-381

Publication Type

Working Paper

Publication Year

2018