What we know and don’t know about declining labor force participation

For decades, the portion of prime-age men (ages 25 to 54) in the labor force has been in decline. More recently, the labor force participation rate of prime-age women has stagnated and also declined. This paper addresses the consequences of, and reasons for, these declines, especially among men. A subsequent effort will address appropriate policy responses.

Women’s increasing workforce participation through the late 1990s largely masked the precipitous decline in male participation rates. Men’s rates have fallen about 8 percentage points over the past 60 years. On both fronts, the U.S. is also falling behind other advanced economies. U.S. prime-age female participation fell from 6th to 17th of 22 OECD member countries between 1990 and 2010. Over the same period, the decline in the prime-age male participation rate was the second most severe of the OECD countries, and is now the third lowest among the 34 member countries. The U.S. trends are particularly pronounced for non-Hispanic black men and less-skilled adults. There is now an 11 percentage point gap in participation rates between men with a college degree and those with a high school degree or less—whereas 50 years ago, the two rates were very similar.

Explanations for these trends tend to focus either on the demand for workers or the supply of labor. Trade and technology have reduced the demand for certain types of work, particularly less-skilled labor in fields like manufacturing. Of the two, most economists believe that automation has played the larger role. Manufacturing’s share of GDP has remained relatively stable but, thanks in part to productivity improvements, the sector now employs only two-thirds as many people as it did 30 years ago. Technological change has widened the wage gap between skill levels. While a man with a high school degree earned about three-quarters of the wages of his college-educated counterpart in 1980, he now earns about half as much. At the same time that technology has made certain jobs obsolete, new jobs are being created in other areas (both high-wage managerial and technical jobs and low-wage service sector jobs), but these new jobs often require different skills or pay lower wages.

On the supply side of the labor market, the problems include not only a lack of skills, but also high reservation wages, poor health, and the availability of disability insurance or other forms of unearned income. The trend away from work has coincided with a startling increase in premature mortality as reported by Anne Case and Angus Deaton,1 and high rates of disability and pain as reported by Alan Krueger.2 The extent to which these are a consequence or a cause of the drop in labor force participation remains unclear.

Disability receipt has risen sharply, though most experts believe this can explain only a fraction of the decline in participation rates among prime-age men. More employment among women might also help explain the drop for men, but the men who are out of work are less likely to be married or to have children than those with families. Time use surveys indicate that men without work are not spending significantly more time on housework and child care than their employed counterparts. Instead, they are engaged in leisure activities, like playing video games.

In “What we know and don’t know about declining labor force participation: A review,” Brookings Senior Fellow Isabel Sawhill and Research Assistant Eleanor Krause argue that there is likely a high degree of interaction between each of these factors. A man might initially lose a good-paying manufacturing job to outsourcing or automation, then search for a new position while collecting unemployment insurance, and find nothing he deems acceptable. He might be averse to taking a job as a home health aide, seeing it as “women’s work,” or he might be unwilling to take a large pay cut. Perhaps he then becomes discouraged or depressed, may even turn to drugs or alcohol, and finally applies for SSDI based on a history of arthritis or a bad back.

In sum, there appears to be a growing gap between the skills demanded by today’s employers and those supplied by the labor force, though other factors also contribute to this decline. As the demand for less-skilled labor declines, the relative wages of less-skilled workers also decline. Some dislocated workers are able to relocate to communities with stronger job markets, some pursue training programs to learn new skills, some accept lower-paying positions, but many leave the labor force altogether. Reversing the decades-long decline in participation rates, and the rising inequality associated with declining wages for the less skilled, will require a major investment in education and training as well as better adjustment assistance for workers in declining fields. Reforming social insurance programs to deal with longer periods of joblessness and to provide more flexibility for individuals with disabilities and family care responsibilities might also enable more people to work.

There is still a lot that we don’t know about America’s declining labor force participation rate, and it is only one symptom of what may be a fundamental transformation in the economy that requires new and updated policies as a response.

To learn more, read the full paper here.

Source: What we know and don’t know about declining labor force participation: A review

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2017-05-23T16:59:33+00:00