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Real Time Insight

One of the most widely-cited economic trends of the last few years has been the drop in the labor force participation rate.

While the pace of the decline has accelerated since the Great Recession, the labor force participation rate has actually been in a secular downtrend since 2000.

It is currently at 62.8%, which is a 36-year low.

There are several factors at play here. But before we dive into why the labor force participation rate has been declining, let's first understand exactly what it is.

The Labor Force Participation Rate Defined

According to the Bureau of Labor Statistics, the labor force is defined as the sum of all persons 16 years and older in the civilian noninstitutional population who are either employed, or unemployed but available for work and actively looking for work.

The equation for the labor force participation rate is as follows:

Labor Force Participation Rate = (Employed + Unemployed) / Working Age Non-institutionalized Population

The working age non-institutionalized population is defined as 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 and homes for the aged) and who are not on active duty in the Armed Forces.

Discouraged Workers Aren't in the Labor Force

One of the reasons for the big drop in the LFPR right after the last recession was due to how the Bureau of Labor Statistics defines someone as "unemployed". To be officially considered "unemployed", a person has to have looked for work sometime in the last 4 weeks.

It doesn't include "discouraged workers", or those who want to work and are available to work and who have looked for a job sometime in the last 12 months but not in the last 4 weeks because they don't think anything is available to them. This means that if you're not working and haven't looked for work in the last 4 weeks, you're technically not in the labor force.

But this is more of cyclical trend that ebbs and flows with the economy. In fact, the number of discouraged workers has declined recently. The BLS estimates there were a total of 697,000 discouraged workers in May 2014, down from 780,000 in the same month last year. And yet, the LFPR has fallen from 63.4% to 62.8% over the same period.

More College Students

There are several other reasons for the low participation rate. One of them is the increase in the number of full-time college students. According to the National Center for Education Statistics, between 2001 and 2011, enrollment in degree-granting institutions increased 32%, from 15.9 million to 21.0 million. If a student isn't working or looking for work while in school, they're not in the labor force. This likely explains why the labor force participation rate for people age 16-24 has fallen from 63.3% in 2002 to 54.9%.

Blame the Baby Boomers

However, there is another group that has been dropping out the labor force in droves: Baby Boomers.

Roughly 10,000 Baby Boomers turn 65 every day in this country. And while many of them aren't retiring right away, there are still a decent chunk leaving the labor force. And this demographic shift is driving the overall labor force participation rate lower - and will likely continue to do so for years to come.

In 2010, just 13% of Americans were age 65 and older. By 2030, when all members of the Baby Boom generation have reached that age, the Pew Research Center population projects more than 18% of the country will be at least that age.

And even though the labor force participation rate for people age 65 and over has steadily increased over the last couple of decades, it is still a relatively low 18.5%.

In other words, don't expect the labor force participation rate to return to its peak anytime soon. While a lower labor force participation rate has negative consequences for long-term economic growth, if the biggest reasons for the decline are more college students and retirees, then that's not a bad thing, in my opinion.

A More Meaningful Metric

Given the demographic shifts in this country, perhaps a much more meaningful labor force metric is the participation rate for people ages 25 to 54. That excludes most college students and retiring Boomers.

As you can see below, this number has been declining too since the Great Recession, but the drop has not been as dramatic:

The labor force participation rate for this group was steadily around 83% from the late 1980's until 2008. However, it was 80.8% in May 2014. That's not an alarming drop, but it's a number that should be improving along with the economy.

So why has the participation rate dropped among this age group?

Your guess is as good as mine on this one.

Are there more stay-at-home moms and dads these days? Or have the incentives for people not to work increased that much in the last 6 years? Perhaps there is something else at play?

Chime in below!

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