Labor force participation is a complex phenomenon that is affected by a variety of factors, including demographic characteristics, federal policies, and economic conditions. Demographic characteristics such as sex, year of birth, education, marital status, and the presence of young children in the household all play a role in determining labor force participation. Trends in labor force participation within demographic groups, combined with changes in population demographic characteristics, help explain changes in the overall labor force participation rate. For example, since about the year 2000, the labor force participation of people without a university degree has declined, but the effect of that decline on the overall labor force participation rate has been reduced due to the decreasing proportion of the population without a university degree. Age is an important factor in labor force participation for people under 25 or over 54, but it is not as significant for those in between.
Illness or disability is a common reason for not working, particularly among men. Women are more likely to be out of the workforce due to caring for a family member. Federal policies can also have an impact on the labor force participation rate, with different effects depending on the demographic factor. For instance, the earned income tax credit increases the labor force participation of single mothers without a college degree, while it has only a slight effect on married women with college degrees. Income is also affected by education, marital status and the presence of young children.
People outside the workforce report several reasons for not looking for work, such as illness or disability (which may or may not entitle them to DI benefits), retirement and feeling discouraged from looking for a job due to inadequate salary. The Affordable Care Act (ACA) can also reduce effective tax rates and discourage workforce participation. The labor supply and demand curves illustrate how demand for employees at certain wage levels and hours that employees are willing to work at certain wage levels interact. If demand decreases, the curve shifts to the left and companies are willing to pay lower wages per hour of work. If technological advances help increase output from current employees, the labor demand curve will shift to the right. Federal fiscal and spending policies can also affect labor force participation over time by changing net wages.
Factors that increase the likelihood of being left out of the labor market include having a long-term health problem, low levels of education and being a woman with dependent children. If child care costs rise, this can reduce labor supply as it becomes more expensive to go to work and pay for child care instead of staying at home. Changes in labor force participation can distort the importance of unemployment rate as an indicator of economic health. During recessions and slow recoveries, many unemployed people become discouraged from looking for work and leave the workforce. As job availability improves, some of these discouraged workers re-enter the workforce. Preferences for products produced by a company or industry will also have an impact on labor demand.
Understanding how labor supply and demand curves interact is essential to understanding how the labor market works.