Labor force participation and conspiracies

There is a great deal of misinformation floating around the real unemployment and labor force participation rates.

Conspiracy theories abound, so a dose of reality might be helpful. It is best to focus where the confusion lies: on the data regarding labor force participation by folks 16 and older.

The civilian labor force participation rate consists of adults aged 16 and older who are either working or actively looking for a job. That means people who are 16 or older but not working or not looking for a job are not considered part of the labor force. Last month, the labor force participation rate was 62.7 percent. That means that out of every 100 people aged 16 or older, almost 63 were working or looking for a job, while 37 were neither working or looking for a job.

For some odd reason this fairly simple definition has sent all sorts of folks into conspiracy mode, suggesting that the unemployment rate is terribly understated and that there is a vast army of unemployed who’ve dropped out of the labor force. As is always the case with conspiracy theories, the truth is far less exciting.

The labor force participation rate, which has been compiled since 1948, peaked at 67.3 percent in the winter of 2000. It has been in steady decline ever since, but the post-World War II average is 62.9 percent, or almost exactly where we are now. The dynamics of this statistic are pretty easy to understand.

From 1948 to the mid 1960s, the rate hovered at between 58 percent and 60 percent. From the late 1960s through 1990 it rose steadily and shortly thereafter steadily declined. Three things explain nearly all these changes.

In the mid-1960s, employment opportunities for women blossomed and by the early 1980s, nearly a third of households had two working adults. By the mid 2000s, that rose to two thirds of households. So the spike in the employed share from the 1960s to the 1990s is partly due to increased work options for women.

From the mid 1980s to the present, a much larger share of young adults has gone to college. In the 1950s and 1960s, fewer than a quarter of men and women went to college. Last year, more than half of new high school grads spent at least a year in school.

Since these millennials comprise the largest demographic, their time spent acquiring human capital pushes down the labor force participation rate. That will soon change, as the youngest millennials turn 17 this year and will soon enough be working.

The single largest change to labor force participation is the baby-boomers. They entered the labor force in the mid-1960s and shockingly began to retire 40-plus years later. So, the recent declines in labor force participation can be explained by the simple eagerness of returning World War II veterans to come home, pick up their interrupted lives and start a family.

It isn’t conspiracy or venal economic forces that lead to a declining labor force participation rates. It is simply the passage of 71 years since 1945.