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The composition effect in the labor force participation rate

In previous posts, we’ve used FRED to show how demographic factors relate to the current decline in the labor force participation rate. This post also uses FRED data to illustrate how the composition of the labor force relates to its current decline.

The first graph shows the aggregate labor force participation rate (thick black line), which leveled off in the 1990s, started to decline, and then declined further during the recent recession and thereafter. The other lines in the graph show the various age categories of the labor force participation rate. The so-called “prime working age,” which is 25-54 years, follows a similar pattern as the aggregate rate, but its decline is not as pronounced: It declined about 3 percentage points, while the aggregate rate declined almost 5 points. So the other age categories must also be contributing to the overall decline. The 16-19 years category declined dramatically and is certainly part of the story. Fewer students work during their high school years now, and more go to high school and college. To some extent, this same effect applies to the 20-24 years category.

What about the 56 years and older category? Their participation rate has increased, so does that mean they have counterbalanced the decline in younger workers? We look more closely at this question: The number of workers in this category has increased, as the Baby Boomers have gotten older and moved out of the prime working age category. And the participation rate of this age group is lower than the aggregate rate, so an increase in their numbers (and in their share of the labor force) implies a net negative contribution to the aggregate participation rate. Such an effect is called a composition effect.

We illustrate this effect in the graph below by comparing the reported overall participation rate (again: thick black line) with an artificial line (in blue) constructed by keeping the population shares of each age group constant. This constructed series does not show as much of a decline, which implies that, overall, changes in the shares of the age groups have contributed to the aggregate rate’s decline.

How these graphs were created: Search for “labor force participation rate years,” and all the series you need should be there. (FYI: This graph uses seasonally adjusted data.) Use the “Add to Graph” button to add these series to the top graph. For readability, thicken the line for the aggregate rate. For the bottom graph, add the aggregate rate as before. Create the other data series by adding the first age category to the graph and then adding all the other age categories (in the same order as in the first graph) with the “Modify existing series” option. Then use the “Create your own data transformation” option for this series to apply the following formula: 0.348*a + 0.5*b + 0.066*c + 0.088*d. (This formula reflects the recent population shares of each age category as determined by the figures in the civilian noninstitutional population data.)

Suggested by Christian Zimmermann

View on FRED, series used in this post: CIVPART, LNS11300012, LNS11300036, LNS11300060, LNS11324230

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