Tag: Aging of U.S. population

New York Fed Economists Analyze the Decline in the Labor Force Participation Rate

The ability of any economy to produce goods and services depends partly on the number of people working in the economy. The number of people working depends on the size of the population and the fraction of the population that is working. As we discuss in Macroeconomics, Chapter 9, Section 9.1 (Economics, Chapter 19, Section 9.1), the labor force participation rate (LFPR) is the fraction of the working-age population in the labor force. (Technically, the “working-age population” is the civilian, non-institutional population age 16 and older.)

The figure above shows the values of the LFPR from January 1948 through February 2023. The steady increase in the LFPR beginning in the late 1960s and lasting until 2000 was caused by an increase in the number of women working outside of the home and the effects of the baby boom–the increase in birth rates between 1946 and 1964–which led to a decline in the average age of the U.S. population. The LFPR reached a peak of 67.3 percent in early 2000. The gradual decline in the following years reflects the aging of the population as birth rates fell and a small decline in the fraction of prime-age workers–those between ages 25 and 54–in the labor force.

The start of the Covid-19 pandemic in the United States in March 2020 led to an abrupt decline in the LFPR followed by a gradual recovery. In February 2020, the LFPR was 63.3 percent. In February 2023, it was 62.5 percent. The difference means that about 2.1 million fewer people were working in February 2023 than would have been working if the LFPR had regained its February 2020 level.

What explains the LFPR not regaining is pre-Covid level? The following figure shows that in February 2023, the LFPR for prime-age workers had reached its February 2020 level. The implication of the figure is that the decline in the LFPR for the whole working-age population is due to a decline in labor force participation by non-prime-age workers.

This conclusion is confirmed by the analys of economists Mary Amiti, Sebastian Heise, Giorgio Topa, and Julia Wu of the Federal Reserve Bank of New York. (Their paper can be found here.) They consider three possible explanations for the decline in the overall LFPR:

  1. The aging of the U.S. population
  2. An increase in fraction of people in different age groups who have retired
  3. An increase in the fraction of the population that is disabled, as result of suffering from “long Covid” or for other reasons

After analyzing the data they find that an increase in retirement rates (explanation 2), particularly for older people, has had only a small effect on LFPR. They find that “Once we adjust for aging, we find that the share of disabled individuals not in the labor force has, in fact, marginally declined.” So explanation 3 is not the key to the decline in the LFPR. They conclude that 1 is the most likely explanation: “Removing the effect of aging can explain the entire participation gap ….” The figure below summarizes their results. The gold line shows that if the United States had the same age structure in February 2023 as it had in February 2020 (that is, if the average age of the working population were lower, with fewer people older than 65), the LFPR would not have declined.