Small movements from a lot of labor market churn
Since the early 2000s, labor force participation has been declining in the U.S. After peaking at 67.3 percent in March of 2000, the labor force participation rate declined consistently to 62.4 percent in September 2015 and has since flattened out. The first graph shows the period of decline in the labor force participation rate, which started in early 2000, flattened out in mid-2005, and then declined again from the onset of the Great Recession to 2015.
Several variables in FRED can illustrate the labor force dynamics at play behind the declining labor force participation rate. The next graph shows the annual change in the labor force (employment plus unemployment). While the labor force has mostly been increasing since 2000, it has not been increasing fast enough to keep up with population growth. Starting in 2014, however, the pace of growth in the labor force picked up, which led to the flattening out of the participation rate.
The last graph shows monthly flows into (red line) and out of (blue line) the labor force. These gross flows are very close to each other, with the net changes (green line) always close to zero. It is the net changes that explain the evolution of aggregate labor force participation. From 2009 to 2016, the positive values are not enough to offset the more negative values and more people flowed out of the labor force. More recently, however, the positive contributions more than offset the negative values, leading to an increase in participation. Despite this recent evolution, the graph does not seem to point to any particular new trend that’s different from the past. This suggests that more research is needed to understand the observed decline in the participation rate.
How these graphs were created:
Graph 1: Search for “Labor Force Participation.” Graph the first result and limit the date range from 2000 to current.
Graph 2: Search for “Unemployment.” Graph the series titled “Unemployment Level.” From the Edit Graph tab, type “Employment Level” in the customize data section search box. Click the series titled “Civilian Employment Level” and then click Add. Finally, type a+b in the formula box and change the units to “Change, Thousands of Persons.”
Graph 3: Search for “Labor Force Flows.” Graph the series titled “Labor Force Flows Employed to Not in Labor Force.” Repeat the process outlined in Graph 2 to modify the line by adding “Labor Force Flows Unemployed to Not in Labor Force” to the graphed series. Now, select the middle menu and search for “Labor Force Flows Not in Labor Force to Unemployed” and add this series as a new line. Repeat the process to modify the line by adding “Labor Force Flows Not in Labor Force to Employed.” Once again, use the middle menu to add “Labor Force Flows Not in Labor Force to Employed” as a new line and then modify the line by adding the remaining three flows as additional series on the new line. Use the letters assigned to each series to calculate the difference of the sum of those flowing into the labor force less those flowing out of the labor force (e.g., consider (a+b)-(c+d)).
Suggested by Maximiliano Dvorkin and Hannah Shell.
When the unemployment rate rises, it’s partly that more employed persons are losing their jobs and partly that fewer unemployed persons are finding jobs. Although there’s no consensus on which is more important, some research finds that the flow of persons from unemployment into employment accounts for the lion’s share of changes in the unemployment rate. These unemployment-to-employment flows are cyclical and fell starkly in the Great Recession, as the graph above shows. Persons may also flow from outside the labor force (neither employed nor unemployed) directly into employment; this is also an indicator of the ease or difficulty of getting a job. This flow from “nonparticipation” to employment is expected: Some persons who’d like a job aren’t formally searching and so aren’t counted in the BLS measurement of unemployment. There are also new entrants into the workforce, such as recent graduates and parents returning after a hiatus for child care. The flow from nonparticipation into employment (that is, the proportion of nonparticipants taking a job) is much lower than the flow from unemployment to employment (graph above), but the two series track each other nearly perfectly in their cyclical fluctuations (graph below).
How these graphs were created: Search for Labor Force Flows and select the (seasonally adjusted) “Unemployed to Employed” and “Not in Labor Force to Employed” series and add them to the graph. Then in the “Add a Data Series” section, search for “Unemployed” (monthly, thousands of persons, seasonally adjusted) and select “Modify existing series” for series 1. Repeat these steps with “Not in Labor Force” for series 2. For both series, in the “Create your own data transformation” section, apply the formula a/b. Start with the first graph to create the second, but change the y-axis of series 2 from left to right. Note: These measures of the rates of flow aren’t precise because of “time aggregation bias”: That is, these measures compare employment status at two points in time (the beginning and the end of the period), but they don’t take into account any changes in employment that may have occurred between those two points.
Suggested by David Wiczer.
View on FRED, series used in this post: