Sunday, May 18, 2014

Why Is Labor Force Participation Declining?

Participation in the labor force (either by being employed or by looking for work) is on the decline in the U.S.

In many ways this issue is a political filter: Republicans think this is all about the lazy people taking over the country, while Democrats think this is about social programs helping people who have better ways to spend their time opt out of the labor market.

Both of these are probably wrong, but you’d need to read and understand some economics to figure that out. Here’s Evan Soltas with some econometric analysis. Do note that these selections are in order within the blog post, but may seem out of order since I’ve removed some context.

… It really is an important question. … The drop in the labor force means that the U.S. has forfeited, perhaps permanently, that labor input and whatever marginal output it would have yielded. A simple calculation1 suggests that the share of output lost is about three percent; more in-depth calculations from Reifschneider, Wascher, and Wilcox (2013) place it at the center of their estimate of a seven-percent drop in potential output. That's a lot. You don't blow three percent of GDP, let alone seven, every day.

I conclude that, of the 2.8-percentage-point decline in the labor force participation rate over that six-year period, more than half (1.7 percentage points) can be explained by underlying changes in demography, though a substantial fraction (1.1 percentage points) cannot.

The 95-percent confidence intervals on those figures are that between 1.4 and 1.9 percentage points are explained and between 0.8 and 1.4 percentage points are unexplained.

… I've deliberately gone out of my way to include common narratives about why the labor force participation rate has fallen. The aging and retirement of the Baby Boomers. The rise in worker disability. The rise in college enrollment. Furthermore, the unexplained share of this method will identify the specific areas of unexplained changes -- for instance, if women en masse suddenly have decided to stop working (and it turns out they haven't), this method will point at that issue. So one of the huge advantages to this approach is that it allows us to do a bunch of tests of specific theories one-by-one and say whether they hold water or not.

What matters to explaining the decline in the labor force participation rate? One thing above all else: aging, which explains 1.3 percentage points of the drop. The next most important: enrollment in school, which explains 0.8 percentage points of the drop. Remember that individual explanations can sum to more than the total, because there are other changes that partially offset. For example, the rise in educational attainment, which comes from this enrollment, explains a 0.6 percent rise in the labor force participation rate, because the well-educated work like crazy.

What matters less? The rise of disability, which explains 0.2 percentage points of the drop. The decline in the birthrate during the recession, which would suggest a 0.1-percentage-point increase, since fewer people are tied down at home with four-year-olds. 

And what just straight up doesn't matter? Changes in the share of people on welfare, disability aside. Changes in health, after accounting for disability and age. Changes in the sex and race composition of the labor force.

The big picture of this is that we just need to stop talking about the primary explanations offered by Republicans and Democrats. They’re both lying.

N.B. I do not see that Soltas included a variable to capture Mulligan’s argument that some of the drop in participation may be due to increased marginal tax rates on the poor.

Via Marginal Revolution.

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