The Worrisome Decline in the Labor Force Participation Rate 
Jeff Lemieux
revised March 7, 2004 to add Tables 1 and 2 (showing details of the hypothetical unemployment calculations).  Originally published on March 5.

The latest jobs figures, showing an increase in net payrolls of only 21,000 in February, were a surprise to Wall Street, but not to Centrists.Org.  Last month, we predicted that the January figures were overstated and that expectations for February shouldn't be too optimistic.

Job growth will probably pick up this spring and summer -- there is an enormous amount of economic stimulus in the pipeline, and the economy is likely to continue growing at a brisk clip at least through the end of the year.  

However, the continuing decline in labor force participation is troubling.  If the labor force participation rate had remained steady at its March 2001 level, there would now be 2.8 million additional people counted as jobless, and the unemployment rate would be over 7 percent.

President Bush says the economy is on the mend.  GDP growth has been robust in recent quarters, and few economists predict a return to slow growth or recession any time soon. 

Meanwhile, Senator Kerry and former Democratic candidate John Edwards complain that the number of jobs is still down by over 2.3 million since employment peaked in March of 2001. 

On the one hand, the reported unemployment rate is 5.6 percent (which isn't terrible by historical standards). 

However, the unemployment situation may be understated by the significant number of Americans who have dropped out of the labor force. 

Actually, the latest household survey shows that the civilian labor force -- the number of people working or looking for work -- has expanded by 2.6 million since the start of the recession in March 2001.  However, the overall population (over age 16) has grown by over 8 million during that time.  Thus, the labor force participation rate is down by over a percentage point, from 67.1 percent in March 2001 to 65.9 percent in February 2004.

If the labor force participation rate had stayed at 67.1 percent since 2001, the unemployment rate would now be over 7 percent (see Figure 1).  The number of jobless workers -- currently estimated at 8.2 million -- would be closer to 11 million instead.  (For details of these hypothetical and actual unemployment figures, see Tables 1 and 2 at the bottom of this page.)

Figure 1.



Labor force participation usually declines in a recession.  When the labor market sours, young workers go back to school and older workers retire early.

After a while, job seekers may become discouraged and stop trying to find work. 

Indeed, after the number of jobs started to fall in April 2001, the labor market participation began to fall as well (see Figure 2).

Figure 2.

 

However, after a fitful 2002, U.S. economic growth returned to a decent 3 percent rate in 2003, and predictions abound for a growth rate of over 4 percent in 2004.

But robust job growth has not returned, and workers seem to be staying out of the work force.

There is a dispute among economists.  Maybe the large "payroll" survey -- the standard measure of job growth -- is understating employment, because it doesn't count self-employed workers and might also miss recent hiring at very small firms.

On the other hand, there's a chance the household survey is overstating the size of the total population.  That could cause a higher number of people to be shown as working. 

On balance, most economists -- notably including Alan Greenspan -- favor the larger payroll survey, which shows a stagnant jobs picture, as the best indicator of the labor market situation.  Figure 3 (below) shows the latest trends in employment from both surveys. 

Eventually, the statisticians will figure out why the data are painting differing pictures.  Job levels in the payroll survey will probably be revised up while employment in the household survey is revised down.

A year or two from now, these labor market questions may be easier to explain.

In the meantime, however, the data seem to indicate that workers are voting with their feet -- and they are staying away from the labor market.  That probably indicates that times remain harder than the robust GDP figures would imply.

Figure 3.

---

Table 1.

Hypothetical Unemployment
(Assuming Constant Labor Force Participation Rate)
	Population	Labor	Particip.	Unem-	Unempl.
	(age 16+)	Force	Rate	ployed	Rate
	[thousands]	[thousands]	[percent]	[thousands]	[percent]
Jan-2001	213,888	143,787	67.2	5,941	4.1
Feb-01	214,110	143,652	67.1	6,004	4.2
Mar-01	214,305	143,873	67.1	6,110	4.2
Apr-01	214,525	144,021	67.1	6,668	4.6
May-01	214,732	144,160	67.1	7,124	4.9
Jun-01	214,950	144,306	67.1	7,437	5.2
Jul-01	215,179	144,460	67.1	7,454	5.2
Aug-01	215,420	144,622	67.1	8,366	5.8
Sep-01	215,666	144,787	67.1	7,929	5.5
Oct-01	215,903	144,946	67.1	8,576	5.9
Nov-01	216,117	145,089	67.1	8,871	6.1
Dec-01	216,315	145,222	67.1	9,155	6.3
Jan-2002	216,506	145,351	67.1	9,560	6.6
Feb-02	216,663	145,456	67.1	9,006	6.2
Mar-02	216,824	145,564	67.1	9,421	6.5
Apr-02	217,006	145,686	67.1	9,490	6.5
May-02	217,198	145,815	67.1	9,328	6.4
Jun-02	217,408	145,956	67.1	9,573	6.6
Jul-02	217,630	146,105	67.1	9,762	6.7
Aug-02	217,866	146,264	67.1	9,507	6.5
Sep-02	218,106	146,425	67.1	9,113	6.2
Oct-02	218,340	146,582	67.1	9,594	6.5
Nov-02	218,548	146,722	67.1	10,180	6.9
Dec-02	218,741	146,851	67.1	10,412	7.1
Jan-2003	219,897	147,627	67.1	10,091	6.8
Feb-03	220,114	147,773	67.1	10,365	7.0
Mar-03	220,317	147,909	67.1	10,561	7.1
Apr-03	220,540	148,059	67.1	10,372	7.0
May-03	220,768	148,212	67.1	10,725	7.2
Jun-03	221,014	148,377	67.1	10,639	7.2
Jul-03	221,252	148,537	67.1	11,059	7.4
Aug-03	221,506	148,707	67.1	11,082	7.5
Sep-03	221,778	148,890	67.1	11,317	7.6
Oct-03	222,039	149,065	67.1	10,970	7.4
Nov-03	222,280	149,227	67.1	10,694	7.2
Dec-03	222,509	149,381	67.1	10,902	7.3
Jan-2004	222,161	149,147	67.1	10,581	7.1
Feb-04	222,357	149,279	67.1	10,978	7.4

Source:  Centrists.Org.

---

---

Table 2.

Actual Unemployment
(Includes Declining Labor Force Participation Rate)
	Population	Labor	Particip.	Unem-	Unempl.
	(age 16+)	Force	Rate	ployed	Rate
	[thousands]	[thousands]	[percent]	[thousands]	[percent]
Jan-2001	213,888	143,787	67.2	5,941	4.1
Feb-01	214,110	143,652	67.1	6,004	4.2
Mar-01	214,305	143,873	67.1	6,110	4.2
Apr-01	214,525	143,549	66.9	6,196	4.4
May-01	214,732	143,290	66.7	6,254	4.4
Jun-01	214,950	143,323	66.7	6,454	4.6
Jul-01	215,179	143,674	66.8	6,668	4.6
Aug-01	215,420	143,372	66.6	7,116	4.9
Sep-01	215,666	144,020	66.8	7,162	5.0
Oct-01	215,903	144,171	66.8	7,801	5.4
Nov-01	216,117	144,254	66.7	8,036	5.6
Dec-01	216,315	144,369	66.7	8,302	5.8
Jan-2002	216,506	143,842	66.4	8,051	5.6
Feb-02	216,663	144,546	66.7	8,096	5.6
Mar-02	216,824	144,384	66.6	8,241	5.7
Apr-02	217,006	144,675	66.7	8,479	5.9
May-02	217,198	144,902	66.7	8,415	5.8
Jun-02	217,408	144,738	66.6	8,355	5.8
Jul-02	217,630	144,879	66.6	8,536	5.8
Aug-02	217,866	145,146	66.6	8,389	5.8
Sep-02	218,106	145,606	66.8	8,294	5.7
Oct-02	218,340	145,442	66.6	8,454	5.8
Nov-02	218,548	145,109	66.4	8,567	5.9
Dec-02	218,741	145,157	66.4	8,718	6.0
Jan-2003	219,897	145,875	66.3	8,339	5.7
Feb-03	220,114	145,898	66.3	8,490	5.8
Mar-03	220,317	145,818	66.2	8,470	5.8
Apr-03	220,540	146,377	66.4	8,690	6.0
May-03	220,768	146,462	66.3	8,975	6.1
Jun-03	221,014	146,917	66.5	9,179	6.4
Jul-03	221,252	146,652	66.3	9,174	6.2
Aug-03	221,506	146,622	66.2	8,997	6.1
Sep-03	221,778	146,610	66.1	9,037	6.1
Oct-03	222,039	146,892	66.2	8,797	6.0
Nov-03	222,280	147,187	66.2	8,654	5.9
Dec-03	222,509	146,878	66.0	8,399	5.7
Jan-2004	222,161	146,863	66.1	8,297	5.6
Feb-04	222,357	146,471	65.9	8,170	5.6

Source:  Bureau of Labor Statistics.

---

Links:
Centrists.Org More Slow Job Growth -- Averaging the December and January Jobs Figures
(revised February 7, 2004)

Centrists.Org A Closer Look at the Latest Jobs Figures -- Plenty of Stimulus, a Scarcity of Confidence (January 11, 2004)

Centrists.Org Interpreting the Diverging Employment Statistics (September 29, 2003)

Centrist Policy Network It's the Confidence, Stupid.  (September 5, 2003)