The Plunging Labor Force Participation Rate

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The Plunging Labor Force Participation Rate is Now Officially ‘a Thing’ in U.S. Politics

By James Pethokoukis

February 16, 2012, 11:07 am

You can now add the labor force participation rate to a) the unemployment rate, net new payrolls, c) GDP growth, and d) gasoline prices as economic statistics politicians will often cite as proof the economy is getting better or worse. I just got this chart from the office of Representative Jim Jordan:

Is this chart fair? Well, it is true the labor force participation rate has collapsed. Now, some of that is due to the aging of the baby boomers and some is due to the economic downturn and anemic recovery. Here is the Congressional Budget Office:

The unemployment rate would be even higher than it is now had participation in the labor force not declined as much as it has over the past few years. The rate of participation in the labor force fell from 66 percent in 2007 to an average of 64 percent in the second half of 2011, an unusually large decline over so short a time. About a third of that decline reflects factors other than the downturn, such as the aging of the baby-boom generation.

But even with those factors removed, the estimated decline in that rate during the past four years is larger than has been typical of past downturns, even after accounting for the greater severity of this downturn. Had that portion of the decline in the labor force participation rate since 2007 that is attributable to neither the aging of the baby boomers nor the downturn in the business cycle (on the basis of the experience in previous downturns) not occurred, the unemployment rate in the fourth quarter of 2011 would have been about 1¼ percentage points higher than the actual rate of 8.7 percent.

An even simpler way of measuring the collapse of the U.S. labor market is to simply look at how many people are working as a share of the population:

Simply put, America isn’t working, at least not as much as it should.