Is the Labor Force Participation Rate About to Fall Again?

A few posts back my Atlanta Fed colleagues Tim Dunne and Ellie Terry offered up our latest contribution to the ongoing head-scratching over the rather spectacular decline in U.S. labor force participation (LFP) since the onset of the Great Recession in December 2007. “Rather spectacular” in this case means a fall in the participation rate from 66 percent (of the working age population either working or actively seeking work) to the 63 percent level reported for November. In people terms, that 3 percentage point decline represents a reduction of about 1.4 million participants in the U.S. labor market.

Like many other analysts, Dunne and Terry find that the drop in labor force participation appears to come from a combination of demographic factors—mainly the aging of the population—and other causes not specifically identified but generally interpreted to be associated with the weak economy in one way or another.

Two developing stories suggest the LFP may not be leaving the spotlight just yet. The first is this one, from USA Today:

Some 1.3 million Americans are set to lose their unemployment benefits Saturday…

Federal emergency benefits will end when funds run out for a program created during the recession to supplement the benefits that states provide. The cutoff will initially affect 1.3 million people, but 1.9 million more will lose benefits by mid-2014 when their 26 weeks of state paychecks run out, according to the National Employment Law Project.

What will those 1.3 million Americans do when their benefits run dry? According to a recent study by Princeton University’s Henry Farber and the San Francisco Fed’s Robert Valletta—also presented at a conference hosted here at the Atlanta Fed in October—on balance, the affected individuals are likely to leave the labor force:

We examined the impact of the unprecedented extensions of UI [unemployment insurance] benefits in the United States over the past few years on unemployment dynamics and duration and compared their effects with the extension of UI benefits in the milder recession of the early 2000s. We found small but statistically significant reductions in unemployment exits and small increases in unemployment durations arising from both sets of UI extensions. The magnitude of these overall effects is similar across the two episodes…

We find that the effect on exit from unemployment occurs primarily through a reduction in labor force exits rather than through exit to employment (job finding). This is important because it implies that extended benefits do not delay the time to re-employment substantially and so do not have first-order efficiency effects. The major effect of extended benefits is redistributive, providing income to job losers who would have exited the labor force otherwise (consistent with Card et al. 2007). [link mine]

In other words, if a significant decline in unemployment benefits comes to pass, we may well see another bump downward in the labor force participation rate. Although a decline in LFP associated with the expiration of extended UI benefits would fall in Dunne and Terry’s nondemographic category, the Farber and Valletta results suggest that we should interpret any such decline as structural. And structural in this case means not directly amenable to correction by policies aimed at stimulating spending.

The other important piece of recent news, however, is this one, which you probably heard about:

According to the Bureau of Economic Analysis, real gross domestic product—output produced in the United States—actually grew at a rate of 4.1% in the third quarter, up from BEA’s previous estimate of a 3.6% growth rate. The final results are also a gain over the second quarter’s 2.5% GDP growth.

Furthermore, as noted at Calculated Risk, the good news doesn’t stop there:

A little Christmas cheer…

Via the WSJ:

Macroeconomic Advisers…[raised] its estimate for fourth-quarter growth. It now forecasts gross domestic product to expand at an annualized rate of 2.6% in the final three months of the year, up three-tenths of a percentage point from an earlier estimate.

And Goldman Sachs has increased their Q4 GDP tracking to 2.4% annualized growth.

That all adds up to pretty decent growth in the second half of the year. If it persists, and the long-awaited acceleration in the economic expansion finally arrives, better labor market conditions should follow. And if the six-year fall in LFP has in large measure been driven by weak economic conditions, we should at least see a pause in participation declines as economic activity picks up. Actually, we should probably see an outright increase.

The next several quarters, then, may well provide some clarity as to the persistent question of whether or not the large recent exodus of Americans from the labor force has been the result of a lackluster economy. In this period, we may get some clarity as to whether efforts to stem that exodus were justified by a correct diagnosis of the underlying cause.

Or not.

This piece is cross-posted from Macroblog with permission.

One Response to "Is the Labor Force Participation Rate About to Fall Again?"

  1. benleet   December 31, 2013 at 5:23 pm

    The author gets the numbers wrong. He says the drop in labor force participation "represents a reduction of 1.4 million". Wrong. First look the LFPR at the bls page on historical civilian noninstitutional population: http://www.bls.gov/web/empsit/cpseea01.htm.
    The workforce today is 155.294,000, the civilian non. pop is 246,567,000 — divide = 63%. In 2007 and 2008 the LFPR was 66.0%, 3% of 246,567,000 is 7,397,010, not the author's 1.4 million participants. With the same LFPR as 2007 the unemployment rate would be 11.3%, not 7.0%. If we had the LFPR of 2000 then the unemployment rate would be 12.7%. It is a big deal, not just psychologically, but that too. Eliminating the EUI benefits has already been tried in North Carolina, see this article at the Economic Policy Institute: http://www.epi.org/blog/north-carolinas-failed-ex
    The Center on Budget and Policy Priorities has also covered the issue: http://www.cbpp.org/
    If 4.8 million workers lose their EUI benefits the LFPR may drop by that amount. That would drop the official and inaccurate official unemployment rate from 10.9 million unemployed to 6.1 million below 5%. That would be a joke of sorts. As an effect of eliminating EUI the jobless rate goes down? Yes, that's right. No new jobs are created, but the rate declines — this has been the pattern for the past 4 years. Look at the employment to population rate number in the bls chart– also go cpeg.org monthly report on unemployment. My blog: http://benL8.blogspot.com
    — Yet the GDP is increasing. Only it benefits fewer, and hardship is not mitigated.