The Labor Force Participation (LFP) rate in the United States has decreased by 1 percentage point since the start of the pandemic. This decline is mainly due to persistent “trend” factors, with more than two-thirds of the drop attributed to these factors. Temporary economic conditions, or “cyclical” factors, account for the remaining portion. Projections indicate that trend factors, driven by population aging, could further push LFP down by an additional percentage point over the next ten years.
Although unemployment has fully recovered since the pandemic’s onset, the LFP rate remains consistently low at 62.6% as of July 2023. This raises questions about whether the pandemic permanently impacted participation or if there’s potential for the rate to rise.
To assess the situation, the authors compare the actual LFP rate to its trend, defined as the rate expected when business cycle factors dissipate. They estimate this trend using a model, considering various demographic groups’ trends and population changes. Their analysis shows that more than two-thirds of the 1 percentage point drop in overall LFP from 2019 to 2022 is due to declining trend LFP, while cyclical factors explain the rest. Much of the decline in trend LFP is due to population aging’s effect on the population composition. Projections suggest an additional 1 percentage point decline in aggregate trend LFP over the next decade, primarily driven by population aging.
The analysis breaks down the LFP rate into its components, including cyclical and trend effects for different demographic groups. The findings show that despite the pandemic’s sharp drop, the actual LFP rate surpassed the estimated trend by 2022 due to cyclical effects from a tight labor market. About 0.7 of the 1.0 percentage point drop in the actual LFP rate between 2019 and 2022 is attributed to a decline in trend LFP.
The decline in trend LFP since 2019 is largely due to changes in population composition and aging, which pushed more of the population into age groups with lower labor force participation rates. The decline is also related to retirement, particularly among those aged 55 and older.
Looking ahead, the authors project that the aggregate LFP rate’s trend will decline by an additional 1 percentage point from 2022 to 2032. This projection is primarily due to changes in the population composition, specifically population aging, which is expected to outweigh the positive effect of increased educational attainment on LFP.
In conclusion, this study examines the post-pandemic LFP rate, its trends, and future projections. Despite the LFP rate being above trend in 2022 due to cyclical influences, demographic changes like population aging are expected to continue exerting downward pressure on the rate.
Source: How Far Is Labor Force Participation from Its Trend? | San Francisco Fed (frbsf.org)
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