Why is the US Labor Force Participation Rate Falling?

The labor force participation rate has not recovered as quickly as expected during the COVID-19 pandemic. This low participation rate has been attributed to a variety of factors, such as the need for care for dependents, increased unemployment benefits, and people's fear of getting sick due to the virus. In the last six months, the unemployed as a percentage of the population have risen at major recession rates (Figure 5a). When the labor market is weak, the proportion of the population that is unemployed and leaves the labor force tends to increase.

However, participation rates are likely to increase in the coming years as workers rejoin the workforce to take advantage of high levels of job offers. This seemingly contradictory pattern of overall decline in labor force participation, but increases across all age groups, was also evident at the state level. An additional study will examine whether these people who are retiring are long-term unemployed and may be losing their attachment to the labor market. The general view about the fall in labor force participation rates is that discouraged workers are leaving the labor force.

An examination of labor market turnover among older people, by education and gender, shows that people with less than a degree have the highest dropout rates overall (figures 4a and 4b). While the magnitude of the decline in labor force participation rates during the pandemic was unprecedented, Figure 2 shows that participation rates tend to decline during or immediately after a recession. By protecting people's rights to do the type of work that works best for them and not forcing workers to join unions, policy makers can expand opportunities for people to achieve meaningful and rewarding work. On top of that, if lawmakers continue to expand government size and national debt, a declining workforce could become a vicious cycle.

Therefore, a declining participation rate means that fewer people are employed or actively seeking work. The exit rate fell in subsequent months and last year, but it remains high compared to the average of the previous five years. Despite unemployment rates returning to historically low levels, the labor force participation rate (LFPR) remains low. Labor demand measured by job offers or vacancies has started to cool down, but it is still high compared to pre-pandemic levels.

To expand their workforce, regions with aging and declining populations will need to increase current residents' participation rates and try to attract new residents through national or international migration.

Marlene Barcelo
Marlene Barcelo

Avid social media aficionado. Friendly burrito fan. Wannabe music trailblazer. Subtly charming organizer. Passionate tv aficionado.

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