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Reasons Behind the Decline in Labor Force Participation Rate

What factors have led to the decline in LFPR?

Labor Force participation rate implies that proportion of the population which is above 15 years of age and economically active. It means the people above 15 who are a part of the labor force and are involved in the production of goods or services over a specified period. In 2015, this rate had fallen to a 38 years low, down to 62.6%. However, this fall had started right during the great recession and fell through the 2000s. There were mainly the economic factors behind this fall that occurred as a response to the economic crisis. However, demographic factors have also contributed to this fall. The demographic model provides the best explanation to the fall in labor force participation rate during the 2000s.

The demographic change that the American population underwent is most commonly cited as  a reason behind this decline. The ageing population is an important reason that the LFPR has continued to fall. As the baby boomers started retiring, their retirement coincided with this decline in LFPR. These baby boomers are a large proportion of the US working population. As the baby boomers continued to retire from the workforce, the ratio started falling. Still, it is not only that the participation of the baby boomers has been reduced but the younger generation’s participation has also been on a downward spiral. Over the past few decades the participation of the younger workers that fall within the range of 16-24 years has declined. However, the entire phenomenon cannot be described on the basis of a single demographic factor. Coupled with the recession, there are also several other factors that have reduced the LFPR over time. Regarding the falling participation of the younger workforce, it has happened because of their increased focus on higher education.

The younger generation’s focus is on higher education. It is because higher education is the single easiest route to get into well-paid jobs. As a result their academic life lasts longer than it did some decades ago. Earlier, young people would end their education as soon as they had found a good job. However, now it not just about bagging a job but getting into the upper segment of jobs where the salary is high. In this way, the age at which they join the workforce has gone up. Increased schooling has thus led to reduced LFPR. Increased demand for higher education means that the young Americans stay in their colleges for longer before they are into the workforce. The falling unemployment rate might be a healthy sign but the declining LFPR is not a very good sign. Moreover, while the LFPR for men had started falling in the mid twentieth century, the growth rate of women’s LFPR has been stalled since the 2000s. While an ageing population is the most well known cause of the declining LFPR, it is only a part of the picture. To boost the LFPR, there is a need to focus on fiscal and monetary policies that strengthen the economic growth and make full employment a priority. Moreover, there is a need to control discriminatory employment practices. These things can again boost the LFPR and bring it to a satisfactory level.