Labor Force Participation

The Great Recession of 2007-09 was indeed the worst and most prolonged recession the country has experienced since the Great Depression and it left more than just a bruise, it left several scars.   One of those scars is a reduction in labor force participation – the proportion of the civilian noninstitutionalized working-age population that is either employed or looking for work.  After peaking in the 1990s, labor force participation began to decline nationally and in Virginia.  However, as shown in Figure 1, that decline accelerated sharply in late 2008 as the Great Recession took its toll and total employment began to drop.  Moreover, labor force participation continued to fall even after the economy turned the corner in 2010 and began to add jobs again.  As a result, as of June this year the overall labor force participation rate stood at 63.1 percent nationally and 66.0 percent in Virginia.  That is the lowest either of those figures has been since the 1970s, before women began entering the workforce in large numbers.

Figure 1:  Labor Force Participation – June 1977 to June 2015 (1)

It is also important to realize who has been most heavily impacted by these declines.  Many people might assume that this reduction in labor force participation is being driven by aging baby-boomers moving out of the labor force.  But, if they did, they would be wrong.  Nationally, as shown in Table 1, the 65 and older crowd is the only group that actually increased their labor force participation rate between June of 2008 and June of 2015.  Instead, the group that experienced the greatest decline in labor force participation over this period was males under the age of 35.  A key economic cohort, as these are individuals who would normally be in the process of establishing their career paths, starting a family, and buying their first house.  In addition, although the percentages may seem small, the actual numbers are not.  Nationally, these data indicate that there were almost 1.9 million men under the age of 35 who likely would have been in the labor force in June 2008, but were not in June 2015.

Table 1:  National Labor Force Participation Rates – June 2008 and June 2015 (2)

Why is this happening?  The short answer is lack of economic opportunity.  Although the Great Recession officially began in December of 2007 and officially ended in June of 2009, the recovery that followed has been the weakest we have experienced in living memory.  Nationally, total employment did not return to its pre-recession level until September of 2014 (a period of six years and ten months) and in Virginia, we did not cross that threshold until November of 2014 (a period of seven years).

Keep in mind also, that while we were struggling just to get back to where we were in terms of employment, our population did not stop growing.  Between 2007 and 2013 alone, the working-age population of Virginia increased by more than half a million, while the working-age population of the U.S. increased by almost 15 million, and in both cases approximately one-third of the increase was driven by immigration.  So, even after the economy turned the corner in 2010 and began to add jobs again, employment growth did not keep pace with population growth and labor force participation rates continued to fall.

Why does the decline in labor force participation matter?  For starters, it has made the unemployment rate an ineffective, if not misleading, indicator of slack in the labor market, because discouraged workers who have given up on finding employment are not counted as “unemployed.”  To provide an example of the magnitude of this issue, if Virginia’s current labor force participation rate was the same as it was in June of 2008, the state’s official unemployment rate would have been 11.2% this last June, not 5.0%.

Even more importantly, the reduction in labor force participation has significant implications for future economic growth.  Each year the Congressional Budget Office (CBO) produces a ten-year projection of Potential Gross Domestic Product (GDP), an estimate of the total output that the U.S. economy could produce if available capital and labor resources were fully utilized.  As shown in Figure 2, between 2007 and 2014 CBO downgraded their estimate of Potential GDP for 2017 by 1.4 trillion dollars, or 7.3 percent.  According to CBO, nearly half of that decline was attributable to revised assumptions regarding available labor resources, and those revisions were in turn attributable to the accelerated decline in labor force participation.  In sum, lower labor force participation places downward pressure on the future potential of the economy.

Figure 2:  Actual and Congressional Budget Office Forecasts of Potential GDP (in Trillions of 2009 dollars) (3)

So what is the answer?  Foster greater economic opportunity.  And the best way to do that is by maintaining a business climate that encourages, rather than discourages, the creation and expansion of private enterprise.  Why private enterprise?  Because private sector jobs are the only jobs that are actually self-sustaining, in that the paychecks for those jobs come from revenue that they create, not from taxes that are levied on the economy.  All of which means that Governor McAuliffe’s announced policy that, “Virginia must take action now to catalyze the growth of the private, nonpublic dependent components of its economy,” is both appropriate and timely.

Dr. A. Fletcher Mangum is President of Mangum Economics and a member of the Governor’s and the General Assembly’s Joint Advisory Board of Economists