March 03, 2017

Labor participation dropping in US and Sweden but rising in five of the G7 countries plus Spain

The recent evolution of the U.S. labor force participation rate—that is, the percentage of the population employed or looking for work—has been a controversial topic in macroeconomic discussions and policy debates. After peaking in early 2000, the rate has trended downward, with the bulk of the drop occurring after 2008. The controversy focuses on whether the trend is the result of weak economic conditions or long-run structural forces.

The Great Recession was a global phenomenon felt far beyond the U.S. economy. In this analysis, St Louis Fed reserve analysts compare the evolution of labor force participation in seven developed countries since the mid-1970s with that of the United States to shed light on what is and is not unique to the U.S. economy. The seven countries are Canada, the United Kingdom, Spain, Sweden, Japan, France, and Germany. International comparisons are not always straightforward because labor market variables and statistical methods vary across countries. They use adjusted Organisation for Economic Co-operation and Development (OECD) data to facilitate comparison across countries. In our analysis, they focus on the population 16 to 64 years of age for Spain, the United Kingdom, and the United States and 15 to 64 years of age for the other countries.

In the USA the rate increased then peaked in the late 1990s, and has fallen substantially since. With the exception of Sweden, the other countries’ rates have been steadily increasing. These trends are the result of sometimes opposing forces that reflect changes across countries in social preferences for work and the pursuit of higher education.

Participation by Age

With the exception of Japan and Canada, the labor force participation rates for young men and women have been declining in the past few decades. As discussed in the literature, one main reason for the swift decline is that young people across countries are delaying entry into the labor market to pursue higher education. In fact, OECD data show that the education enrollment rate for young people across the countries increased an average 6.3 percent from 1995 to 2012. In the United States, the bulk of the drop in labor force participation of the young is motivated by education; however, there has also been a mild increase in the number of young people not in the labor force and not pursuing an education or training. For the latter group, the most likely reason is decreasing demand for unskilled labor.

The trends prime-working-age population—those 25 to 54 years of age differ for women and men. With the exception of Sweden, the rates for women have rapidly increased and the dispersion of rates across countries has decreased. One plausible explanation for this finding is that the labor force participation of woman started increasing at different times across countries and countries with initially low participation rates have since caught up. More recently, though, in the United States and Sweden, the rates have remained fairly constant or even decreased somewhat. Until the mid-1990s, the United States had one of the highest labor force participation rates for woman in this age group; it now has one of the lowest.

In contrast, the labor force participation rates for prime-working-age men have been falling in all of the countries. For the United States, the rate fell particularly rapidly—almost 6 percentage points from 1975 to 2013—and has been among the lowest over that time. The rate is now 2.25 percentage points below that for Canada, the next-lowest rate. Given that prime-working-age men are the largest group in the labor force, this decline contributes substantially to the drop in the overall rate. The literature has signaled the process of job polarization as likely responsible for the declining labor force participation rates in many countries around the world. In addition, increased participation in social programs (e.g., disability insurance and food stamps), to which this group is particularly sensitive, may have contributed to the larger decline observed in the United States

Labor force participation rate trends for the population close to retirement age those 55 to 64 years of age vary over time and are common across most of the countries. In almost all of the countries, the rates for men display a U-shaped pattern, decreasing until the mid-1990s but then trending upward. The rates for women, on the other hand, have been increasing throughout. Much of the increase is explained by labor force participation at earlier ages and that once in the labor force, workers tend to remain in it.

Despite the similar long-run trends across countries in the labor force participation rates for the young, prime-working-age, and pre-retirement-age populations, the United States is the only country in the sample experiencing a decline in the aggregate rate in recent years. This finding is explained mostly by a larger-than-average drop in the labor force participation rate for prime-working-age men, a decrease in the rate for prime-working-age women, and a lower-than-average increase in the rate for those near retirement age. In addition, we also find that the share of people in the U.S. prime-working-age population has fallen somewhat, which also contributes to the drop in the overall labor force participation rate

Less Educated Men out of the US work force

Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the media. He is the author of the book Hit Makers. He has written and analysis of the why about ten million prime age american men are not working.

The U.S.’s labor participation rate for this group of men is lower than every country in the OECD except for Israel (an outlier, because of the high number of non-working Orthodox Jewish men) and Italy (an economic omnishambles). Today, one in six prime-age men in America are either unemployed or out of the workforce altogether—about 10 million men.

So, this is the 10-million-man question: Where did all these guys go?

According to a report from White House economists released last week, non-working prime-age men skew young, are less likely to be parents, are disproportionately black and less educated, and are concentrated in the South.

A 2010 analysis by Pew Charitable Trusts found that incarceration reduced the average work time of a typical 45-year-old man by 19 percent. Another study estimated that people who go to prison are 30 percent less likely to subsequently find a job than a non-incarcerated person of their age.

Even if one makes the most aggressive assumptions about the cost of incarceration to unemployment, America’s prison and ex-prison population only explains a fraction of the disappearing male workforce.

Several variables are eating away at prime-age male participation rates. Men who leave prison during a time of historic incarceration have had a hard time finding steady work; some men have turned to disability payments to disengage from a workforce that offered poor pay; some adults have returned to school; and a few (perhaps very few) fathers are staying home while their spouses work.

But behind all of these trends, there is a larger story: the decline of sectors dominated by male workers. In 1954, the highwater mark for male participation, the manufacturing and construction sectors accounted for nearly 40 percent of all jobs. Now, after the long decline of manufacturing and the end of the housing bubble, they account for just 13 percent. These are jobs that men without a college degree can count on, and they're much rarer than they used to be.

Millions of able-bodied men have dropped out of the labor force, mostly because they have stopped looking for work. Many of them badly need to leave their neighborhoods in Appalachia, the Rust Belt, and the Deep South, where the rate of non-working men often hovers around 40 percent. Meanwhile, the U.S. needs more affordable housing construction, particularly in its richest and most populous metro areas.

Here is Derek Thomson's bolder plan: A state-and-federally funded voucher program that moves men from economically stricken areas toward metros in need of construction workers.

This would need all levels of government. Metropolitan areas might have to rezone neighborhoods to provide for more low-income housing, and the GOP Congress would have to agree to what is essentially a multi-billion dollar stimulus package, which it has repeatedly said it will never do.

Trump team has talked about labor participation and big construction boosting policies

Beneath the sunny 4.6 percent jobless rate is the troubling shadow cast by the millions of men ages 25 to 54 who have dropped out of the workforce. For this group, labor force participation has sunk to 88.5 percent from a 1954 peak of 97.9 percent.

Among the root causes:

— Automation. Factory robots and computer software have eliminated the need for many workers, wiping out an array of jobs that once provided a middle class lifestyle.

— Global competition. U.S. workers have been competing for jobs with cheaper foreign workers, a trend that's led to some offshoring of jobs and curbed pay in some industries.

— Criminal records. Stricter criminal laws have left over 20 million Americans with felony convictions and prison records — a fourfold increase from 30 years earlier. That background has made it hard for them to get hired.

— Prescription drug use. Nearly half of jobless men who are no longer looking for work are on pain medication, research has found.

Trump appears to endorse a straightforward fix: Bump up economic growth, and workers will land good jobs at decent wages.

Trump in his address to congress did talk about fixing the drug problem. He talked about expanding treatment for those who are addicted. Trump is talking about getting a trillion spent on construction and infrastructure with private-public partnerships.
SOURCES- St Louis Fed Reserve, The Atlantic, AP

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