from the Atlanta Fed

— this post authored by John Robertson

In the aftermath of the Great Recession, labor force attachment declined. However, that pattern has been reversing itself lately. In particular, the labor force participation rate (LFPR) of the prime-age (25 to 54 years old) population, the core segment of the workforce, has been moving higher since late 2015.

While this is good news, the prime-age LFPR remains well below prerecession levels, meaning that there are more than two million fewer prime-age people participating in the labor force. What factors have contributed to that decline? Where did those people go?

The Atlanta Fed LFP dynamics web page has an interactive tool that allows users to drill down into the drivers of the change in LFPR. The tool breaks the change in LFPR into two parts. The first part is the effect of shifts in the share of the population in different age groups (we use five-year age groups). The second part is the change attributable to shifts in the rate of nonparticipation. Using a methodology described here, we can drill deeper into the second part to learn more about the reasons for not participating in the labor force.

The U.S. Census Bureau will make the first quarter 2017 microdata on the reasons for nonparticipation available in a few weeks, so the following chart shows a decomposition of the 1.8 percentage point decline in the prime-age LFPR (not seasonally adjusted) between the fourth quarters of 2007 and 2016.

In this chart, “residual” pertains to the part of the total change in the LFPR that is attributable to the simultaneous shifts in both age-group population shares and age-group participation rates. In the present case, the residual is zero.

Because we are examining changes in prime-age participation, and all age groups within prime-age have reasonably similar participation rates, a change in the composition of ages tends to have little impact on the overall prime-age LFPR. Instead, the decline is due to shifts in the nonparticipation rate within age groups (the orange bar). In particular, the decline could indicate an increased likelihood of being in school, having family responsibilities that prevent participation, being in the shadow labor force (wanting a job but not actively looking), and a disability or poor health.