by Calculated Risk on 3/16/2018 12:22:00 PM

CR Note: I've written extensively about the Labor Force Participation Rate (LFPR). This is a very detailed analysis and model from the CBO.

Here is the new paper from Joshua Montes at the Congressional Budget Office: CBO’s Projection of Labor Force Participation Rates

From the Conclusion:

This paper details CBO’s methodology for estimating and projecting labor force participation rates. CBO constructs a birth-year cohort model of the labor force participation rate that estimates labor force participation rates by age-sex-education-race subgroups. Using the estimated model to project rates over the next decade, CBO expects the overall rate to decline by 2.7 percentage points, reaching 60.1 percent by 2028.

Most (2.5 percentage points, or about 80 percent) of the 3.2 percentage-point decline since the 2007–2009 recession in the labor force participation rate for the population at least 16 years old is the result of aging. That decline continued a trend that began in the late 1990s and early 2000s as the early baby-boom cohorts began to turn 50 years old, the age at which individuals tend to start reducing their participation in the labor force. CBO projects that the continued aging of the population will further reduce the overall participation rate over the next 11 years by an additional 2.8 percentage points, as most baby boomers age into retirement.

Although aging is the primary driver of the falling labor force participation rate, it is not the only driver, as other structural factors are driving down some group-specific participation rates. First, the members of younger birth cohorts, who are replacing baby boomers in the labor force, have participated in the labor force at lower rates, and CBO projects that this trend will continue to weigh down the participation rate over the next decade. Second, the share of people receiving disability insurance benefits is generally projected to continue rising, and people who receive such benefits are less likely to participate in the labor force. Third, the marriage rate has declined and is projected to continue decreasing, especially among men, and unmarried men tend to participate in the labor force at lower rates than married men. Finally, elements of fiscal policy, including various provisions of the ACA, have increased effective marginal tax rates and reduced the incentive for individuals to supply labor in recent years. The effects of many of these structural factors have been concentrated among the less educated, contributing greatly to the decline in the participation rates of these groups.

Cyclical weakness was also an important factor weighing down the labor force participation rate over much of the previous decade, even as that rate has had much cyclical improvement in recent years. CBO’s estimates show that the drag on the overall participation rate from discouraged job seekers leaving the labor force was as much as 1.2 percentage points in 2014. Since then, many discouraged workers have reentered the labor force, and that cyclical weakness has diminished considerably. CBO estimates that the labor force participation rate remained only 0.4 percentage points below its potential rate in 2017, and that gap will close entirely in the coming years. Increases in populationwide educational attainment have helped boost the participation rate since 2007, on the other hand, as more of the population now holds a bachelor’s degree. CBO estimates that increases in educational attainment have increased the observed labor force participation rate by nearly a full percentage point over the past decade, all else being equal, highlighting the importance of modeling educational attainment in projections of the labor force participation rate. CBO projects these trends to continue over the next decade, boosting the participation rate by almost another full percentage point.

Although most of the decline in the overall labor force participation rate comes from the aging of the baby-boom generation, the decline in the prime-age labor force participation rate over the past decade is entirely unrelated to aging. Instead, other structural factors, including the declining propensity of successive cohorts to participate in the labor market, the increase in disability insurance incidence, the declining male marriage rate, and fiscal policy, have contributed most to the decline in that rate. The contribution of most of those factors to the declining prime-age labor force participation rate has been concentrated among the less educated. CBO expects the contribution of some of those factors to dissipate over the next decade—namely the declining male marriage rate and fiscal policy—whereas others will continue to weigh down the prime-age rate over the next decade.

Furthermore, CBO finds that the effects of the 2007–2009 recession reduced the prime-age labor force participation rate considerably and that lingering cyclical weakness from the aftermath of that recession still lowers that rate some. The agency estimates that cyclical weakness reduced the prime-age rate by as much as 1.3 percentage points in 2014 and 2015. Although the improving economy and labor market have pulled some discouraged prime-age workers back into the labor market, CBO estimates that the prime-age labor force participation rate was still 0.4 percentage points below its potential in 2017. As was the case for the overall participation rate, part of the decline in recent history of the prime-age rate has been offset by the evolving educational attainment distribution. Because individuals with higher levels of educational attainment participate at higher rates, the shift toward more education in the population results in higher rates of participation. The changing educational attainment distribution contributed to an increase in the prime-age potential labor force participation rate of more than a percentage point since the end of 2007. That increase, however, is not enough to offset the decline resulting from other variables. Over the next decade, as the downward pressure from other structural factors on the prime-age labor force participation rate is expected to dissipate, CBO projects that increases in educational attainment will fully offset downward pressure on that rate from those other factors. In addition to the upward pressure from continued increases in educational attainment, CBO expects further cyclical improvement to draw more individuals who had been discouraged from seeking work back into the labor market. As a result, CBO expects those factors to drive an increase in the observed prime-age labor force participation rate over the next decade, from 81.7 percent in 2017 to 82.1 percent in 2028.

Click on graph for larger image.

This graph from the CBO paper shows the CBO projections for the overall Labor Force Participation Rate (LFPR). After a few year of a relatively stable LFPR (as the economy recovered), the CBO expects the LFPR to begin declining again by 2020.

The CBO projection is the LFPR will decline to 61.5% in 2024, and to 60.1% in 2028.

The second graphs shows the CBO projection for the prime age LFPR (people aged 25 to 54).

From the CBO:

The potential prime-age labor force participation rate follows a pattern similar to that of the potential aggregate labor force participation rate over history: It increases through the 1980s and early 1990s, peaks in the middle of the 1990s, and then starts a continuous decline in the late 1990s that persists through about 2017. The magnitudes of the changes in rates giving rise to that pattern, though, are much smaller than the changes in the aggregate rate. In particular, the potential prime-age labor force participation rate fell by 2.0 percentage points over the past roughly two decades, from its peak of 84.0 percent in the middle of the 1990s to 82.0 percent by the end of 2017. However, that decline is entirely unrelated to aging. Interestingly, that downward trend stops over the projection period, when CBO expects that the net change in the potential prime-age participation rate will be slightly positive at about 0.3 percentage points.

A key point: The overall LFPR declined from a high of just over 67% in the year 2000, to the current level of 63%. The CBO expects that the LFPR will start declining again, and will be close to 60% in 2028 (this is close to my earlier projections).