Slow job growth during the current economic recovery has cast greater-than-usual attention on the labor force participation rate. The unemployment rate is one of the most closely watched economic indicators because it describes a factor that is almost universally understood—how many people can’t find a job. A high or rising rate is thought to unambiguously mean that the economy is slowing and times are getting tougher, while a low or falling rate clearly means the opposite.
When considering month-to-month trends, however, this is not always the case. The unemployment rate is the ratio of the number of unemployed persons to the whole labor force (the sum of those who are working and those who aren’t but want to). California’s unemployment rate rose from 10.9 percent to 11.0 percent in March 2012. Household employment rose by 985, while the labor force rose by 19,700. So, the slight rise in the unemployment rate was arguably a good thing, insofar as the expansion of the labor force can be interpreted to mean greater confidence in finding a job. During periods of meager job growth, short-run fluctuations in the unemployment rate often reflect changes in the labor force participation rate.
During and after the last recession, both California and the nation experienced a startling drop in labor force participation—the share of the civilian noninstitutional population 16 years of age and older that is employed or is unemployed but trying to get a job. From 2007 to 2011, the national rated dropped from 66.0 percent to 64.1 percent—the largest 4-year drop on record. Over the same period, California’s labor force participation rate dropped from 65.4 percent to 63.7 percent. In 2001, at the height of the Dot.com boom, California’s rate was 67.1 percent.
Understanding the reason for this decline is important when considering the outlook for the state’s unemployment rate. A sharp rebound in the participation rate would accelerate labor force growth. This would, in turn, require much stronger job growth than has been achieved recently to bring the unemployment rate down. From the time that sustained job growth resumed in August 2010 through May 2012, California’s labor force participation rate slid from 64.0 percent to 63.2 percent, civilian employment rose 445,000, and the unemployment rate fell from 12.4 percent to 10.8 percent. If the participation rate had held steady over that period, civilian employment would had to have grown by an additional 200,000 to bring the unemployment rate down to the same level.
Participation Has Been Trending Down for Some Time
Historically, the labor force participation rate responds mainly to long-term demographic, social, or institutional trends. For instance, as the Baby Boom generation (those born from 1946 to 1964) grew up and joined the labor force, the participation rate rose steadily. The entry of more women into the labor market throughout the latter half of the 20th Century also drove up the participation rate.
By the turn of the century, these trends were reversing. During the late-1990s, the participation rate of women leveled off and then began receding slowly. After 2000, the oldest Baby Boomers began retiring and that group’s participation rate declined. Reflecting in part a greater interest in higher education, the participation rate of 16 to 24 year olds also tumbled.
The impact of business cycles on labor force participation shifted dramatically during the post-WWII era. During the six national recessions between 1948 and 1975, the labor force participation rate rose or held steady. The strong growth of women’s participation more than made up for a gradual decline in men’s. After 1975, recessions were more likely than not to pull down overall participation—the national rate fell during four out of the five recessions since 1975. California’s rate dropped during the 1990-91 and 2001 recessions, but rose slightly during the 2007-09 recession.
The trend of the labor force participation during economic recoveries also changed dramatically beginning with the 1990-91 recession. After the official end of the three most recent recessions, sustained job creation did not begin for as long as 26 months and the labor force participation rate deteriorated significantly during these jobless recovery periods. Furthermore, in a marked change from most previous recoveries, following the 2001 and 2007-09 recessions, the participation rate continued to slide even after job growth resumed.
California’s labor force participation rate peaked just above 68 percent at the end of 1989. By the end of the 1990-91 recession, the rate had slid to 66.4 percent. Afterward, it continued to slide, bottoming out at 65.8 percent in December 1993. Sustained job growth throughout the rest of the 1990s pulled the rate up in stair-step fashion to top out at 67.2 percent during March-July 2001, in the midst of the 2000-01 recession. By the time job growth resumed in August 2003, the rate had fallen more than a full percentage point, to 66.0 percent. Then, in contrast to most prior job-growth periods, the rate continued to fall before bottoming out at 65.1 percent in November-December 2006. The rate regained some ground before and during the 2007-09 recession, but topped out in the early months of 2009 far below the previous peak in 2001. The rate then slid dramatically during the 2009-10 jobless recovery, before stabilizing at a new historic low of 63.4 percent from August 2011 through March 2012.
While California’s overall labor force participation rate fell significantly since the beginning of 2001, there was considerable variation across age groups. The participation of young working adults fell precipitously, while that of the oldest groups rose. The participation rate of adults aged 55 and up increased, rising 5.5 percentage points from March 2001 to March 2012. The rate of 55 to 64 year olds rose from 60.0 percent to 65.5 percent, while the rate of 65-and-older adults rose from 12.4 to 17.9 percent. Notably, the participation rate of 55-to-64 year olds went from substantially below the overall average participation rate in 1990 to slightly above average in 2012.
In contrast, over the same period, the participation rate of 16 to 19 year olds dropped over 20 percentage points—falling from 46.9 percent to 26.3 percent. This group’s rate dropped nearly 9 percentage points during the 2001 recession and jobless recovery. It continued to erode from 2004 through 2007, and then dropped another 6.6 percentage points during the 2008-09 recession and its aftermath. The participation rate trend among 20 to 24 year-olds followed essentially the same path, dropping over 8 percentage points since 2001—from 76.3 percent to 68.1 percent from March 2001 to March 2012. Thus, over the last 11 years, people 55 years of age or older became more likely to be involved in the labor force, while those under the age of 25 became much less likely to be involved.
Where Have They Gone?
Greater school attendance accounted for the majority of the reduction in California’s labor force. The growth of working-age people in school accounts for about three-fourths of the increase in persons not in the labor force that took place from 2000 to 2011, according to California data from the Bureau of Labor Statistics’ Current Population Survey. Of the approximately 1.16 million-person increase in the number of Californians not in the labor force, 866,000 cited being in school as the reason. Of these, nearly 88 percent were between the ages of 16 and 24. The next most often-cited reason was to take care of a house or family member, with 45 to 64 year olds essentially accounting for all of this growth. Interestingly, the number of people citing retirement as a reason for not participating declined by nearly 1,700 (5.2 percent) from 2000 to 2011.
Deciphering what this means to California’s outlook leads to two potential conclusions. The answer largely depends on the extent to which the declining rate is the result of long-run demographic and social factors as opposed to disappointing labor market conditions.
If demographic and social factors are mainly the cause of declining labor force participation, it may only rebound modestly going forward, which would mean that consistent job growth would bring the unemployment rate down quickly. If, on the other hand, disappointing employment prospects are principally the cause, better job growth could reignite labor force growth. In this case, as described earlier, it will take much better economic growth and job creation than has occurred thus far in this recovery to make an appreciable dent in the unemployment rate.
The implications for the long run are also mixed. If the demographic and social trends that have dampened labor force participation persist, then economic growth will be slowed by limited labor force growth and a perpetually higher dependency ratio. However, the drop in labor force participation beginning in 2001 was accompanied by a steady increase in school enrollment by young adults. Going to school typically represents a deferral of employment in exchange for acquiring skills that lead to higher lifetime earnings. Also, there are currently many cases of employers complaining about a shortage of workers with needed skills. Thus, if this higher commitment to education largely persists, the state’s future workforce could be more productive and more likely to possess the skills that are now lacking. In this regard, there may be a large payback coming in the form of higher earning potential, increased business productivity, and faster economic growth.
However, this education investment comes with a cost. In the face of rising tuition and other education expenses, as well as reduced public financial assistance, student indebtedness has reached unprecedented levels which will be a significant financial burden for upcoming graduates. Thus, the boost to economic growth from the hoped-for higher productivity and earnings will be mitigated to some extent by the need to pay back student loans. And you can add to this the fact that in the past people who begin their working lives amid awful economic conditions financially underperform those who start work in prosperous times.
While over the long term, factors such as unemployment and job creation had limited impact on labor force participation became much more sensitive to labor market conditions after the 1973-75 recession. The participation rate lost ground during four out of the five post-1975 recessions, with the most severe reductions occurring during the 2001 and 2007-2009 recessions. It also lost considerable ground during the jobless recoveries after those two recessions as well as after the 1990-91 recession. It may also be notable that the labor force participation rate stabilized in the middle of 2011, coincidental with the latest acceleration in job growth.
On the other hand, in 2006 and 2007, even though the labor market looked good overall—4.9 percent and 5.4 percent unemployment rates respectively—the participation rate dipped, coinciding with significant jumps in public college enrollment and with the ‘in school’ category of those not in the labor force. In 2006, despite the low unemployment rate, California’s housing bubble began deflating which considerably weakened the demand for construction workers. This sudden drop in employment opportunities for low-skilled workers—many of which would be new labor force entrants—likely boosted the attractiveness of going to school.
So it seems reasonable that some, but not all, of the decline in participation since the 1970s was influenced by labor market conditions. Therefore, when sustained job growth resumes, the labor force participation rate should rebound, but not necessarily to the rates that prevailed in the 1990s or earlier.
 According to The Institute for College Access & Success, “Two-thirds of college seniors graduated with loans in 2010, and they carried an average of $25,250 in debt.”