The Decline of the US Labor Force: What's Behind It?

In recent years, the labor force participation rate in the United States has been steadily declining. Since it peaked at 67.3% in 2000, only one state (Utah) and the District of Columbia have experienced increases in their labor force participation rates for the total working-age population aged 16 and over, while 38 states have experienced decreases. This seemingly contradictory pattern of overall decline in labor force participation, but increases across all age groups, was also evident at the state level. So what is causing this decline? There is significant literature examining the decline in the labor force participation rate, including the effect of population aging (see, for example, Aaronson et al.). When the economy is booming, the labor force participation rate increases and often exceeds the expected long-term trend, and during recessions, the participation rate falls below the trend, as non-participants are less likely to enter the workforce and the unemployed (who always show a greater tendency to leave the workforce) increase compared to employees (Elsby et al.).As the nation and workforce aged, the low unemployment rates of older Americans and their continued presence in the workforce reduced the overall unemployment rate.

Maximizing the labor force participation rate in and of itself is not a public policy objective; for example, young people may choose to attend school, middle-aged parents may choose to care for their children, or older people may choose to retire. It is difficult to determine the reasons for this decline, since changes in labor force participation reflect not only the evolution of the population's age distribution, but also other structural factors affecting people's decisions to participate in the workforce, such as current economic conditions, changes in education options and changes in the health of older workers. Because older Americans are less likely than younger Americans to be part of the labor force, this demographic shift reduced the overall labor force participation rate. The labor force participation rate of the main U. S. labor force, comprised of people aged 25 to 54, has declined 2.2 percentage points since 2000.

Specifically, the labor force participation of men aged 25 to 54 has steadily declined from 98 percent in 1954 to 88 percent today. Since the main cause of the fall in the labor force participation rate is the retirement of baby boomers, it is likely that this trend will continue until their retirement rate stops increasing. The labor force participation rate plummeted and has not yet fully recovered since the start of the COVID-19 pandemic. So how could it fall when the economy was booming and labor force participation rates of the working-age population were growing in all age categories?.