Labor Force Participation: Swimming Upstream

Published May 8, 2018

During the Obama years, critics of the administration pointed to falling labor force participation as the primary “cause” of the falling unemployment rate. Apologists for the administration retorted that falling labor force participation was due to the aging of the population. That is, there was net movement of people out of higher participation age brackets into lower participation age brackets. Now, there is a role reversal. With the unemployment rate continuing to fall, critics of the Trump administration point to labor force participation.

What is to be made of these arguments?

First, as I showed in an article published in EconJournal Watch, about half the fall in labor force participation during the Obama years was due to changing demographics, and about half not. So, both the critics and the apologists were about half right. Because of the part of the fall in participation that wasn’t due to changing demographics, the official unemployment rate over-stated the improvement in labor market conditions that was occuring. Adding the fall in labor force participation not due to changing demographics to the official unemployment rate, the recovery from the recession of 2007-2009 looked very slow and – even as of 2016 – incomplete.

LINK for EconJournal Watch:

Such a conclusion was always immediately evident from the Bureau of Labor Statistics’ alternative measure of the unemployment rate, the U6 rate. This measure considers persons who are discouraged from looking for work, are marginally-attached to the labor force, and those who are working part-time who would prefer to work full-time, in addition to those who are out of work and looking for a job. The U6 measure fell during the Obama years, but not so much as to indicate that the economy had returned to full employment.

Second, Old Man Time has continued to move along since Trump was elected President. Therefore, because of continuing demographic changes, labor force participation should continue to fall. But, abstracting from apparently random month-to-month changes, labor force participation has been flat. It is the same in the most recent Current Population Survey (62.8 percent) as it was on average during 2016. Looking at labor force participation by age bracket, participation has increased for 16 to 19, 20 to 24, and 25 to 54 year olds, and has been flat for persons 55 and older. These positive changes have offset the continuing adverse affects of an aging population on participation.

Adding my updated estimate of the fall in labor force participation not due to changing demographics to the official unemployment rate (3.9 percent) gives a total unemployment rate (official and abnormally low participation) of 6.1 percent, which is lower by 0.5 percentage points since Trump was elected. This figure is just above the frequently cited range of 4 to 6 percent of unemployment consistent with full employment.

This picture is reinforced by the movement and current level of the U6 unemployment rate. The U6 measure has continued to fall and is now about 1 percentage point from its all-time low. The bottom line is that we have made considerable progress in reducing unemployment, to include hidden unemployment, but we have some distance to go before we can say, with respect to the labor market, that we have made America great again.