Thursday, February 17, 2011

A Closer Look At the Labor Force Participation Rate

The above chart of the labor force participation rate is very important and highlights several important cultural and societal trends.

The labor participation rate is defined thusly:
The labor force as a percent of the civilian noninstitutional population.
The labor force "includes all persons classified as employed or unemployed in accordance with the definitions contained in this glossary" while the civilian non-institutional population includes "persons 16 years of age and older residing in the 50 States and the District of Columbia who are not inmates of institutions (for example, penal and mental facilities, homes for the aged), and who are not on active duty in the Armed Forces."

Let's simplify the above terms.

The civilian non-institutional population is the biggest possible pool of labor and basically includes everybody in the US. A subset of this population is the labor force, which is everybody who is employed or unemployed. The participation rate is simply a ratio that shows what percentage the labor force (everybody who is employed or unemployed) is of the total population.

The participation rate increased from a little after 1960 until 2000 and then started to decrease. The question for this decrease is "why?"

There are two fundamental reasons. The first is that women as a percentage of the labor force increased and stagnated over the same time period. As women entered the workforce starting in the early 1960s the labor force participation rate (the percentage of the population either employed or unemployed) increased in sympathy. However, women as a percentage of the labor force plateaued in 2000 and dipped slightly thereafter, leading the labor force and therefore the participation ratio to decline.

Secondly, there is the issue of the baby boomers or "someone born during the demographic birth boom between 1946 and 1964.[9]" Someone born in 1946 would turn 60 in 2006 and be 65 in 2011. As these people have retired, they have left the labor force (they are neither employed or unemployed). Hence, we have the second reason for the decrease in the labor force participation rate -- retiring baby boomers.

Expect to see the participation rate continue to decline as the underlying dynamics of the labor force change.