Labor Force Participation Dynamics
Almost 63 percent of the population was employed or actively looking for work in the third quarter of 2016. This is one of the lowest rates of labor force participation since the late 1970s and is almost 5 percentage points below its peak in 2000.
This website features data that the Atlanta Fed constructed on the reasons for nonparticipation, and features interactive tools that allow users to explore these reasons for themselves. The data are available for download here.
Reason for Not Participating, by Age and Year
Use the options in the chart below to explore labor force participation data by year, reason for not participating, or by population distribution.
Decomposing the Change in Labor Force Participation
Use the options below the chart to change the contributions based on age, gender, and time period.
Same-quarter comparisons are recommended because data are not seasonally adjusted.
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As the following chart shows, the labor force participation (LFP) rate for the U.S. working-age population has varied over the last several decades. From the early 1970s through the early 2000s, two factors had significant influence on the upward movement in LFP.
- Rapidly rising participation of prime-age women through the late 1990s.
- Low but rapidly rising participation of older Americans since the mid-1990s
However, the rate of participation has plummeted since 2007. This fall in the LFP rate has attracted considerable attention among economists and policymakers because the onset of the decline coincided with the largest economic downturn since the Great Depression.
In the third quarter of 2016, the LFP rate was 63.0 percent (not seasonally adjusted), 3.2 percentage points lower than third-quarter 2007. Just over half of this decline can be accounted for simply by shifts in the age composition of the population. The remainder reflects a mixture of cyclical responses to the recession and continuation of longer-term participation trends within age groups.
One useful way to examine the decline in the LFP rate since 2007 is to look at the reasons people give for not participating. The main reasons for not wanting a job are enrollment in an educational program, family or household responsibilities, severe illness or disability, and retirement. In addition, there is a "shadow labor force." The shadow labor force is composed of people who say they want a job but they are not counted as unemployed—either they are not currently available or have not looked recently; some are discouraged over their job prospects. The rate of nonparticipation by reason varies over time, age, and gender. Changes in some categories, such as the shadow labor force, can be attributed to the state of the business cycle. However, changes in other reasons for not participating are better explained by longer-term trends such as later retirement among older workers and rising youth school enrollment rates.
The chart below shows how much of the change in the LFP rate since 2007 is attributable to changes in nonparticipation by reason, controlling for the part of the change resulting from shifts in the age distribution of the population. The black line is the total change in the LFP rate since 2007. The orange section is the part that comes from the shift in the age distribution of the population (holding age-specific nonparticipation rates fixed). The rest are the contributions coming from changes in the age-specific nonparticipation rates by reason (holding the age distribution of the population fixed). Notice that while most factors helped pull participation lower, two of them actually kept the LFP rate higher than it otherwise would have been. Each of the factors is described in detail below the chart.
The following factors put downward pressure on the labor force participation rate between 2007 and 2016.
- Aging of the population: The aging of the population has had a significant effect on the LFP rate. Without the shifting distribution of the population towards older individuals since 2007, the overall labor force participation rate in Q3 2016 would have been 2.1 percentage points higher.
- Rising education: Education has become increasingly important in the last couple of decades. Young people are devoting more of their time to schooling instead of the labor market, and older individuals are more likely to return to school to move forward in their careers than in the past. The recession likely amplified these trends as it allowed youth to delay entry into the job market and gave others an opportunity to retool. Rising school attendance explains about 0.8 percentage points of the overall decline between 2007 and 2016.
- Health problems: The percent of the population who say they are too sick or disabled to work has been rising for some time, and the rise has been occurring even among young and prime-age individuals. Holding the age distribution of the population fixed at 2007 shares, the increase has contributed 0.7 percentage points to the overall decline in labor force participation.
- Shadow labor force: The percent of the population on the margin of the labor force who say they want a job but for some reason are not actively looking for work rose during the recession across all age groups. The contribution of this factor has shrunk over the last couple of years, but still accounts for about 0.3 points of the overall decline between 2007 and 2016.
The following factors put upward pressure on the labor force participation rate between 2007 and 2016:
- Retirement: A significant factor that has worked against declining participation is that a larger share of older Americans are staying in the labor force than in the past. All else being equal, if those people older than 60 were just as likely to retire in 2016 as they were in 2007, the labor force participation rate would now be about 1.0 percentage point lower.
- Family responsibilities: The share of the population who chose not to participate in the labor market because they were taking care of their family declined during the Great Recession—especially among women. This gave a temporary bump to the rate of labor force participation. The effect held the labor force participation rate up by about 0.4 percentage points between 2007 and 2010, but this effect has largely dissipated since.
The following chart shows the contribution of these various factors on the net change in labor force participation from 2007 to 2016. Each of the factors is explored in more detail on this page.
Decomposing the Change in the LFP Rate over the Last Year
Between third-quarter 2015 and third-quarter 2016, the LFP rate increased 0.32 percentage points—the largest year-over-year change since 2006, mostly reflecting what is likely to be a short-term reversal of cyclical factors. Almost all of the nonparticipation factors that had put downward pressure on LFP since 2007 have reversed course and positively contributed to an increase in the LFP rate during the past year. In particular, the share of the population who cited nonparticipation because of health problems or being in school declined. The shadow labor force also declined. The decline in schooling and illness nonparticipation rates is particularly noteworthy because it contrasts with the increasing trends that were in place prior to the recession.
- Aging of the population: Over the last year, the aging population was the only significant factor depressing LFP. In line with the contribution from previous years, it accounted for about 0.20 percentage points of the decline in the LFP rate.
- Retirement: Retirement rates ticked up slightly, resuming an upward trend that had stalled in the past few years. Later retirement was the largest influence on LFP in the past year, boosting the rate by 0.23 points.
- Shadow labor force: The share of the population who are not technically "unemployed" but say they want a job fell slightly over the past year. This decline boosted the LFP rate by 0.04 percentage points. (A decline in this category is usually associated with a strengthening labor market.)
- Health problems: The share of the population who said they are too chronically ill or disabled to work declined for the second year in a row, reversing the trend of the prior eight years. This decline put upward pressure on LFP (0.06 percentage points) and could partly be a reflection of a stronger job market with more opportunities for those with disabilities (see this report from the U.S. Bureau of Labor Statistics (BLS) for more information).
- Rising education: The share of the population who are not in the labor market because they are in school decreased, boosting the LFP rate by 0.16 percentage points. School enrollments rates rose for decades, then accelerated during the recession. The decline during the past year likely reflects a small reversal of that business cycle-induced rise and a catch-up to the path of the long-term trend.
- Family responsibilities: The share of the population who are not participating because of family responsibilities declined over the last year, boosting the LFP rate by 0.06 percentage points.
The following chart shows the contribution of these various factors on the net change in the LFP rate from 2015 to 2016.
The chart below shows projections of labor force participation from three different sources. One is produced by the BLS (done in December 2015), one by the Congressional Budget Office (January 2016), and one by Daniel Aaronson and colleagues of the Federal Reserve Bank of Chicago. The last one, by Daniel Aaronson, is not a forecast as such, but the trend component of LFP absent cyclical factors.
While all three projections anticipate lower LFP in the future, they vary in how much lower LFP will be by the end of the decade.
Why is there such a wide range in LFP forecasts? Intertwined cyclical forces and long-term trends make it difficult to determine what level the labor force participation rate would be today had the recession not happened, and difficult to determine where the rate is headed. One effect is clear, however. The aging of the population will continue to put downward pressure on overall participation for the next several years.
Over the Life Cycle
One of the most important features of labor force participation is that it varies considerably over the life cycle, with the rate of participation low among young individuals, peaking during the prime-age years of 25–54, and then declining as individuals reach retirement.
But the age-participation profile of the population has also changed over time. The rate of participation declined among young and prime-age individuals and increased among older individuals for several years leading up to the Great Recession. Participation has continued to move lower since the end of the Great Recession for the young and the prime-aged, but the participation rate for older people has not increased since 2009.
Just as the rate at which people participate in the labor market varies with age, the reasons for not participating also vary with age. Young people who are not in the labor force mostly cite school as their main activity. Individuals 25 to 50 years old who are not in the labor force are mostly taking care of their family or home. After age 50, disability or illness becomes the primary reason people do not want to work—until around age 60, when retirement begins to dominate.
Aging and Retirement
The birth rate in the United States surged during the 20 years after World War II. The so-called baby boomer generation—people born between the years 1946 and 1964—caused a bulge in the age distribution of the population. These baby boomers are now graying. The oldest of them turned 62 and became eligible for Social Security retirement benefits in 2008—right in the middle of the Great Recession.
Because the population over 60 has a much lower rate of labor force participation than do younger individuals, the increase in the size of the retirement-age population has been putting significant downward pressure on the overall rate of labor force participation, especially since around 2008.
The result of the outward shift in the age profile of the population has been a significant rise in the share of the population who say they are not in the labor force because they are retired.
Even though the LFP rate of older Americans is low, until 2011, it had been rising over time. This increase helped offset some of the downward pressure on labor force participation that comes from the aging of the population. Between 1999 and 2011, the LFP rate among those aged 60 to 70 years old increased by about 10 percentage points, from 33 to 43 percent (an 8-percentage-point increase for males and 12-percentage-point increase for females). Primary explanations for the upward trend include increased life expectancy and hence longer periods that need to be financed, increases in education, and changes to retirement programs, such as Social Security reforms and the rising use of defined-contribution rather than defined-benefit retirement plans, which lowers the incentive to retire early. However, the LFP rate among 60- to 70-year-olds has been essentially flat since 2011. It is not clear what has caused this flattening out in the rate of participation or whether it will persist.
Men have always been more likely to participate in the labor market than women, but the gap has closed significantly over time. In fact, until recently, their participation trends have generally been moving in opposite directions—declining for males and rising for females. From 1970 to 1999, the male participation rate declined from 80 percent to 75 percent. This decline coincided with rising participation by women, with the female participation rate increasing from 43 percent in 1970 to a peak of 60 percent in the late 1990s. By 2008, male participation was down to 73 percent, and female participation had slipped slightly to 59 percent. Since then, the participation rate for both men and women has declined further. Although there has been some stabilization in both female and male participation over the last year, female participation in second-quarter 2016 was 57 percent—the lowest level since 1990—and male participation was 69 percent—the lowest on record.
The main factor that tends to separate men's and women's participation decision is household and family responsibilities, particularly among prime-age individuals. On average, about 14 percent of women between 25 and 54 years old cite house or family responsibilities as the main reason for not participating, compared to less than 1 percent of same-age men. The difference is even larger among those with children. One-fifth of prime-age women with children are looking after their family compared to just 1 percent of prime-age men with children.
During the Great Recession, women became a bit less likely to stay at home to look after the family.
This decline put upward pressure on women's labor force participation during the recession. The so-called "added worker" effect suggests that these women entered the labor market when other household members lost their job and the household budget became constrained. The chart below shows the contribution of each reason for not participating to the total change in men and women's LFP between fourth-quarter 2007 and second-quarter 2009.
Almost all (86 percent) of the people who choose not to participate because they are in school are 16 to 24 years of age. Therefore, most of the movement in this category can be explained by looking at trends in young people's attachment to the labor market.
The labor force participation rate of young people has generally been declining since the late 1990s. After slowing in the mid-2000s, the decline accelerated again during the Great Recession. However, participation has been relatively stable since 2010.
The primary driver of the decline in youth participation has been greater attachment to educational programs and lower rate of employment while in school. Between 2007 and 2015, the change in the share of those 16- to 24-year-olds who didn't want a job because they are in school closely matches the change in labor force participation of 16- to 24-year-olds. Both measures increased by about the same amount during the recession and have been relatively unchanged in recent years.
As jobs become more difficult to find, the opportunity cost of going to school tends to decrease and so it becomes more common to go to college or to remain in school for longer. Education not only improves employment outcomes, but it also allows individuals to delay entering a tough job market. The recent flattening suggests improving labor market conditions might represent a "catching up" to the longer-term trend of increasing school enrollment rates.
In 2016, 13 percent of people who gave schooling as a reason for not participating were 25–54 years old. During and immediately following the recession, prime-age individuals became more likely to enter educational programs. Specifically, the share of 25- to 54-year-olds pursuing school instead of the job market increased from 1.0 percent in fourth-quarter 2007 to 1.2 percent in fourth-quarter 2009, thus reducing the LFP rate of prime age individuals by 0.2 percentage points.
The rate of nonparticipation because of disability or illness increased during the recession, but was also rising for many years prior to the recession. The share of the population who say they are physically unable to work rose from 4.6 percent in 1999 to 5.0 percent in 2004 to 5.4 percent in 2009, and to 6.0 percent in 2016.The age group most likely to cite poor health or disability as a reason for nonparticipation are those between 50 and 60 years old—a large segment of the baby boomer population. However, the aging of the population alone accounts for only about 36 percent of the overall rise in reported disability or illness between 1999 and 2009, and only about 15 percent of the increase since 2009. Instead, disability or illness has become more common within age groups over time, and this has accounted for the majority of the overall increase.
The incidence of nonparticipation because of disability or illness accelerated during the recession—a phenomenon that cannot be explained by the aging of the population. Instead, it seems the recession also played a role. As employment opportunities became scarce, the labor force participation rate of disabled persons fell by more than their nondisabled peers, and a greater share of people reported they were not participating because of serious health problems than would have been predicted based on the prior trend. It's also true that the disability rates are higher and increased by more for those without a college degree—a group that tends to have a higher risk of unemployment than others.
Data from the Social Security Administration on disability insurance benefits confirm both the longer-term upward trend and an acceleration during the last recession for prime-age individuals. Both measures have declined somewhat over the last two years, possibly reflecting much improved labor market conditions. However, it is an open question how long this reversal will continue and whether the upward trend that was in place before the recession will resume.
Shadow Labor Force
To be considered unemployed by the BLS, a person has to not only want a job but also be (1) available to work and (2) actively seeking employment. Many people who say they want a job don't exactly meet these criteria. Some of these individuals are considered "marginally attached" to the labor market—having actively sought work sometime in the previous year but not the past four weeks. These people are included in the broader measure of unemployment known as U6. Another group includes people who want a job but are not marginally attached. This distinction is not particularly important, as it turns out. Everyone who says they want a job is similarly attached to the labor market; all tend to search for work or find jobs at a higher rate than others outside of the labor force. For this reason, these individuals can be thought of as the shadow labor force.
During the most recent recession, the shadow labor force grew rapidly, and the rise was prevalent within every age group. This change was notable because there was no upward trend in "want a job" prior to the recession.
It if were not for other factors holding up labor force participation during that time, this effect alone would have pulled labor force participation down by 0.8 percentage points between fourth-quarter 2007 and second-quarter 2009.
Since the second quarter of 2009, much, but not all, of the rise in "want a job" has reversed. Still, in third-quarter 2016, the shadow labor force was 0.55 percentage points above its prerecession level. Moreover, the ability of these people to find employment seems to have improved. Over the past two years, there has been a notable rise in the percent flowing to employment and a corresponding decrease in the percent flowing into unemployment.
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