Last year I looked at some of the cyclical and long term trends for the participation rate: Labor Force Participation Rate: What will happen?. I concluded that most of the decline in the participation rate is due to changes in demographics – not cyclical. I also noted that it is possible that long term trends, especially more older workers participating in the labor force, combined with some cyclical improvement, could push the participation rate up a little over the next few years, and then the participation rate would start declining again.
What happens to the participation rate is an important question. If the Civilian noninstitutional population (over 16 years old) grows by about 2 million per year – and the participation rate stays flat – the economy will need to add about 100 thousand jobs per month to keep the unemployment rate steady at 8.9%.
If the population grows faster (say 2.5 million per year), and/or the participation rate rises, it could take significantly more jobs per month to hold the unemployment rate steady. As an example, if the working age population grows 2.5 million per year and the participation rate rises to 65% (from 64.2%) over the next two years, the economy will need to add 200 thousand jobs per month to hold the unemployment rate steady.
That is why forecasting the participation rate is important – and why reports of the number of jobs needed to hold the unemployment rate steady are all over the place (and can be very confusing – and I’m guilty of using different numbers).
Here is a look at some the long term trends (updating graphs through February 2011):
This graph shows the changes in the participation rates for men and women since 1960 (in the 25 to 54 age group – the prime working years).
The participation rate for women increased significantly from the mid 30s to the mid 70s and has mostly flattened out. The participation rate for men has decreased from the high 90s to 88.8% in February 2011. (up slightly from January)