The US has been enjoying recoveries in both economic growth and employment over the past few years. Hundreds of thousands of new jobs have been added to the economy, and the rate of those still seeking work has steadily fallen. However, while employment figures may be recovering, below the surface of the US labour market a more troubling long-term trend is becoming apparent: a rapidly declining labour force participation rate.
In June, the White House released a report detailing this problematic development within the US economy. The trend itself is nothing new – as the report shows, a decline in prime-age male labour force participation has been an ongoing issue for the past half-century – but its continued depth and consequence is becoming increasingly evident.
According to the report: “For more than 60 years, the share of American men between the ages of 25 and 54, or ‘prime-age men’, in the labour force has been declining.” In 1954, a total of 98 percent of prime-age males were participating in the labour force. Today, that figure has slipped to 88 percent.
Prime-age males participating in the US labour force
Labour force participation differs from the unemployment rate: unemployment figures record those who are out of work but looking for work, and the numbers are therefore prone to cyclical fluctuations. Labour force participation rates, on the other hand, provide a longer term view of employment trends by recording the total number of people either in employment or looking for work. Those not recorded as participating in the labour force are those who neither have a job, nor any intention of securing one. The last few decades have seen a steadily growing number of prime-age men opting out of the labour force entirely – something that is a major cause for concern.
Speaking to World Finance, economist, and author of the The Rise and Fall of American Growth, Robert J Gordon outlined the key problems with this declining labour force participation rate. He noted: “In addition to the hardship suffered by those who lack jobs, the decline causes slower economic growth, smaller tax revenues, [and] higher government deficits.” From increased attention to sluggish US growth rates – particularly Larry Summer’s secular stagnation thesis – to growing concern over rising US debt obligations, fixing the US’ falling labour force participation rate seems to be a vital issue.
Fewer men go to work
In popular imagination, the 1950s are often recalled as a time of strong US economic performance: following the reconstruction of war-torn Europe, the US was surging ahead as the world’s leading economic, as well as political, power. Employment was booming. Labour unions, once engaged in violent conflict with US business, had reached a comfortable compromise with employers. Well-paid and stable jobs formed the core of the US economy, allowing manufacturing hubs such as Detroit and Youngstown, Ohio to flourish. This supposed golden economic decade also saw the peak in labour force participation – not since 1954 have as many prime-age men contributed to the US labour force.
After the 1950s, male labour force participation began to steadily edge downwards until around 1965. In that year – coinciding roughly with the unravelling of the post-war golden years of US prosperity – participation rates started to deteriorate at a quicker pace. Between 1965 and 1975, the share of American prime-aged men in the labour force fell from 96.7 percent to 94.2 percent. This relatively sharp fall has since continued, averaging 0.16 percent per annum.
The labour participation rate also took a sharp tumble following the recession, set in motion by the 2008 financial crisis. By 2007, the labour force participation rate for men stood at 91.5 percent – it then fell to 87.9 percent by October 2013. Since then, as of 2016, the share of prime-aged men in the labour force has recovered slightly, in line with a broader economic recovery.
Many of those who dropped out of the labour force between 2009 and 2013 began actively seeking employment again as the economic outlook improved. However, at a rate of 88 percent, the labour force participation rate still languishes at 2.5 percent lower than the pre-2008 recession figure. Despite the economy – and the unemployment rate – broadly recovering, the labour force participation rate has not.
This is in line with recoveries from other recessions: since the 1950s, nearly every recession has been followed by an economic recovery with a lower rate of labour force participation for prime-aged working men than before. Many of those pushed out of the labour force in downturns, it seems, never return – either as employees or as those seeking work. At the same time, even in years of expansion and general economic good health, the rate of prime aged male labour participation still finds itself generally in decline.
The causes of this decline are complex and, for the most part, unclear. There are a number of potential supply side explanations – however, none on its own seems able to account for the overall large drop in labour force participation.
Labour force participation rates provide a longer term view of employment trends by recording the total number of people either in employment or looking for work
For many years, the declining participation rate for males in the workforce was seen as a by-product of the increasing participation rates of women. Indeed, the steep decline from the late 1960s onwards coincided with the major breakthroughs of the women’s liberation movement: women were increasingly free to pursue careers, so it seemed reasonable that, alongside changing social attitudes, more men began to stay at home while women assumed the role of breadwinner. Growing wages for female workers also made this a possibility. As the White House report noted, it was often assumed that “as women worked more hours at higher wages, their incomes could potentially make non-participation more affordable for their husbands”.
Yet this does not fully explain the decline in male labour force participation. Firstly, less than a quarter of men of prime working age who are not in the workforce have a wife who is also working. In actual fact, as the White House report noted, that “figure has actually decreased during the last 50 years, notwithstanding the large overall increase in the number of women who work”.
It is also important to point out women have also seen their labour force participation rates decline, albeit less steeply. As Jason Furman noted in a recent article in the journal Foreign Affairs: “In 1999, after decades during which millions of women began to work outside the home, 77 percent of prime-age American women participated in the labour force. Today, that figure has fallen to 74 percent.”
The decline of labour participation rates also coincides with the rise of increased social security disability payments. According to the White House report: “Disability insurance is another candidate for a supply-side explanation of the decline in prime-age male labour force participation rates.”
Disability payments have been rising among prime-aged men in the past five decades, with a total of 3.3 percent of this demographic now receiving some kind of payment. Yet this also fails to adequately account for the significant drop in participation rates. Between the late 1960s and 2014, prime-age men’s receipts for disability benefits increased by one to three percent: this only explains a fraction of the 7.5 percent decline in
labour force participation.
Similar rises in disability payments can also be seen across other mature economies – yet the US still suffers from a unique drop in prime-age male labour force participation. As the White House noted: “The increase in disability insurance therefore explains, at most, a small fraction of the decline in the labour force participation rate for prime-age men.”
Job market expectation vs job market reality
While various supply-side explanations can help explain parts of the decline in prime-age male working participation, the strongest explanations seem to be demand-driven. A supply-side explanation entailing a reduction in men offering their labour for sale in the market would, in theory, lead to a rise in cost for those remaining in the workforce. As supply decreases, wages would rise – and yet, this has not happened.
Less-educated men of prime age have seen their labour force participation rates fall the most steeply. Yet at the same time, the White House report noted: “In recent decades, less-educated Americans have suffered a reduction in their wages relative to other groups. From 1975 until 2014, relative wages for those with a high school degree fell from over 80 percent of the amount earned by workers with at least a college degree to less than 60 percent.”
This decline in wages was in line with a decline in demand for lower and middle-skilled labourers within the US economy. Economists give several reasons for this decline in demand: many point towards the offshoring of US manufacturing jobs in the past few decades – often blamed on trade deals such as NAFTA – as well as increased import competition. Others point to the increasing technological changes in the economy, which are biased in favour of those with higher skill sets, or automation in general. Whichever the explanation, “these forces have, among other things, eliminated large numbers of American manufacturing jobs over a number of decades”, according to the White House report.
These declines in wages also go further: as well as reducing wages, this change in demand for less-skilled labourers has also led to what the White House refers to as “inconsistencies between workers’ expectations”. What this means is many men of prime age had or have an expectation of “the types of jobs they have traditionally had access to (and that were closely associated with their identity)”, rather than an expectation which matched with “the realities of the jobs currently available to less-educated workers – for example, the decline in available jobs in manufacturing”.
This discrepancy between expectations and what is available on the job market has led many to leave the labour force. Many of the jobs that have disappeared can reasonably be labelled ‘middle-skilled’ jobs, with often only the least skilled and lowest paid jobs left. This again leads to questions of expectation versus the new reality of the labour market. According to the White House, studies have shown “middle-skill workers who become unemployed rarely re-enter employment in either low- or high-skill jobs”.
America’s jobless recovery
Addressing the issue of the US’ diminished labour force participation rates is vital. The importance of ensuring that, for the future of US economic growth, low-skilled and less-educated workers are able to re-enter the job market was argued in a recent paper published by the National Bureau of Economic Research (NBER). Titled Education, Participation and the Revival of US Economic Growth, the paper explored the potential for a revival of non-college graduate employment participation rates, and how it would reboot growth rates in the US economy.
The paper noted “the investment boom of 1995-2000 drew many younger and less-educated workers into employment”, although it did not offset declines in labour force participation elsewhere. However, following the beginning of a downturn in the US economic cycle around the turn of the millennium, participation rates once again tapered off for this cohort. Further: “The participation rates for these workers declined during the recovery of 2000-7.” This was the period of the jobless recovery. The participation rate once again took a serious plummet following the post-financial crisis recession, again with less-educated workers most heavily affected.
With this in mind, the paper asked whether the “continuing economic recovery [will] enable these workers to resume the higher rates of participation that preceded the Great Recession”. Ensuring they do, the paper argued, is vital for US economic growth.
Growing educational attainment became a key source of US economic growth
During what the paper termed the “period of growth and recession” between 1995 and 2014, a key driver of growth was the boom in the technology industry. The tech industry demanded higher expertise or education levels from workers, meaning growing educational attainment (a key component of labour quality) became a key source of US economic growth, despite the falling labour force participation of less educated or skilled workers. This growth in the quality of the labour force supported growth, as “their labour services are complementary to the use of information technology”, again according to the report.
Now, however, the report claims this “growing educational attainment will gradually disappear as a source of US economic growth”. The gains earned for the economy from an increasingly educated workforce are now facing diminishing returns. However, NBER hoped that, “while labour quality will grow more slowly, hours worked will grow much faster”.
If labour force participation rates – primarily for less-educated workers – can be boosted, the US could see a return to the levels of growth it enjoyed in the late 1990s and early 2000s. A return of robust economic growth hinges “on the recovery of participation rates that declined sharply during the Great Recession that began in 2007-2009, especially for less-educated workers.”
Labour force participation rate recovery, then, is vital. If the rates are able to recover, economic growth rates in the period 2014-24 “will be comparable to growth during the period 1990-2014, mainly due to more rapid growth in hours worked”, said the NBER report. Without giving any precise policy prescriptions, it concluded: “Policy should focus on reviving investment and re-establishing the pre-recession participation rates of the labour force.”
At the same time, while policies that could return labour force participation rates enjoyed by the US economy prior to the 2008 recession are desperately needed, they will not address the long-term decline seen since the 1960s. According to Gordon, there is one key piece of policy that could help reverse the decline: “Overall the most important missing policy is a much more generous safety net of vocational training to retrain workers who have lost their jobs.”
With many workers leaving the workforce as demand for low-skill labour dries up, such a policy of retraining will be vital in the long term. While it is argued that demand for low-skilled labourers will form the foundation for the next round of US economic expansion, to bring participation rates above pre-2000 levels, policies such as that proposed by Gordon will have to be enacted with longer-term goals in mind in order to reverse the trend.
The reversal of the declining labour force participation rate is key to US growth in both the short and longer term. Discounting for small minorities that have dropped out of the job market due to changes in gender roles or being genuinely incapacitated, increasing numbers of men who are no longer engaged in the labour force will continue to present both economic and social problems.
Increased rates of labour force participation among lesser-educated workers signal the potential growth of social problems; communities across the US are liable to find themselves completely estranged from the formal labour force, bringing with them the well documented associated crime and social dysfunction. However, if this reversal is to be achieved, it will have to be a top priority for the next US administration.