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The declining labor force

New job seekers aren't offsetting the retiring Boomers

When we talk about the labor market we often focus on the unemployment rate. But an equally important measure of labor market conditions is the labor force participation rate (LFPR).

The LFPR is equal to the employed plus the unemployed, divided by a measure of U.S. population. Think of it as those who want to work (i.e., have a job or want one) relative to those who could work (the entire population over age 16 that isn’t incarcerated or on active military duty).

The above FRED graph plots the monthly U.S. LFPR starting in 1948. One striking feature is its hump shape, which is related to demographic factors. LFPR fluctuates around 59% until the late 1960s, when it starts rising. This rise is attributed to the Baby Boomer generation joining the labor force, as well as to the widespread entry of women into the labor force. The LFPR plateaus at around 67% in the late 1990s and starts to decline in the 2000s.

This decline wasn’t just a result of the Financial Crisis of 2007-08. The year 2008 is also when the oldest Baby Boomers started turning 62, the earliest age they could claim Social Security benefits.

LFPR has declined since then, which can be explained by the Baby Boomers retiring and slower U.S. population growth: Subsequent generations have been smaller than the Baby Boomer generation, so their entry into the labor force hasn’t made up for the retiring Boomers.

The recent COVID-19 crisis led to the largest drop in LFPR on record: from 63.4% in February 2020 to 60.2% in April 2020. (See this Economic Synopses essay for more on retirement during COVID-19.) While the LFPR has partly recovered, it is still below its pre-COVID levels. However, the trend line in the graph shows that the post-pandemic LFPR is not far from what we would expect, given its downward trend.

How this graph was created: Search for and select “Labor force participation rate.” From the “Edit Graph” panel, use the “Add Line” tab to select “Create user-defined line.” Set the start and end dates to January 2000 and January 2022, respectively, and the start and end values to the predicted labor force participation rates for each date based on the regression—here, 67.38711 and 61.56833, respectively. A note about the trend line: FRED has no built-in trend line functionality, so we had to download the data (Excel, Stata, or other statistical packages work), regress date on labor force participation rate values from January 2000 to January 2022, and then calculate the predicted labor force participation rates for those dates.

Suggested by Miguel Faria e Castro and Devin Werner.

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