Labor Force

How many people are looking for work?  How many jobs does the labor market need to create to provide work for all those looking for work?  The answer depends very much upon three factors.  The first is the extent to which the goods and services produced are exchanged in the market place.  In many less developed countries a good deal of production takes place at home and there would be fewer people looking for work in the labor market.  They would be working at home in the fields where they would not be counted as part of the labor force and not in factories where they would be counted.  

There is also the sheer size and growth of the population.  All other things equal, the labor force would be expected to be larger and growing faster in countries or regions with large and rapidly growing populations.  As you will see in the section on demographic change, the growth rate of the population is slowing in the US, which should slow the growth of the labor force.  The link between the two is apparent in the graph of the labor force and the population.  They clearly share a similar upward trend, but they are not a perfect fit.  Before the 1960s the number of individuals working, or looking for work, was growing about one-third slower than the overall population growth.  By 1965 the population was 33 percent higher than in 1948 while the labor force was only 22 percent larger. The situation changed markedly, however, after 1965. Since 1965 the growth rate in the labor force has increased by approximately 85 percent while the population growth rate has slowed by 35 percent. As a result the labor force has been expanding at a rate twice as fast as the overall population, a differential attributable in roughly equal parts to the aging of the baby-boomers and the increasing labor force participation rates.

There is, however, a second demographic effect which can alter the link between the population and the labor force and help explain the differences between the two lines in the above graph.  The age composition of the population also matters, and because the baby boomers are such a large cohort, when they age this has potentially significant impacts on the labor market.  This is certainly what is behind the social security scare - when the boomers get to retirement age there will simply be too many of them and too few workers.  In the diagram below, the aging of the baby boom is quite evident as the share of the population older than 64 and younger than 16 rises into the 1960s due to the high birth rates, and then begins to fall as the leading edge of the boomers begins to enter working age.  By the 1990s the dependent population begins to rise again as a result of longer life expectancies, immigration, and the boomers children.

Finally there are societal and economic factors that can affect the labor force.   More specifically, there are factors that will influence the likelihood individuals will enter the labor force.  The measure used to capture this likelihood of labor market activity is the labor force participation rate - the percentage of the working age population in the labor force.  There is clearly an international dimension to the participation rates.  Among the industrialized countries, labor force participation rates range from a high of 66.6 percent in the US to a low of 47.6 in Italy.  Within the US, the growth of social security in the US has certainly contributed to the decision of older individuals to leave the work force, while the passage of the Civil Rights Act in 1964 may have contributed to the decision of increasing numbers of women to enter the labor force. 

As you can see from the diagram below, there have been significant changes in labor force participation rates in the US. In the post WWII era there has been a convergence in the participation rates of males and females.  Participation rates of males have fallen nearly 10 percentage points to 76 percent, while the participation rates of women have risen more than 20 percentage points to 57 percent. In 1950, women were only 40 percent as likely to be in the labor force as men, but by 1990 the likelihood had risen to 75 percent.

These changes in participation rates have not, however, been evenly distributed across age and marital standing. The participation rates of single males and females have changed only slightly in the past thirty years, except for those over 45 who are increasingly likely to have left the workforce. Among men, the decline in participation rates can be explained primarily in terms of lower participation rates of married men older than 65. By 1990 the labor force participation rates of married males under age 45 had changed only marginally from their 1960 levels, but the rates for those over 65 were less than half of their original amount. Changes in the participation rates for women, meanwhile, were most noticeable among the young and middle aged women. Between 1960 and 1988, the labor force participation rates of young and middle aged women rose from less than 1/3 to more than 2/3.

Where the labor force participation rates go from here is still an open question. Part of the reason for the uncertainty is the chicken and egg nature of the problem. Have women entering the work force because of a desire to work in the marketplace, pushed down average wages as they have flooded the market, or have women entered the work force in increasing numbers because of the decline in average earnings? While there is no consensus on this issue, we can be certain that as the convergence in participation rates continues, the largest changes are behind us.