Chart Of The Day: Labor Force Participation Decomposition

The civilian labor force participation rate in the United States has declined from 65.7% in January 2009 to 63.0% as of March 2016.

The labor force participation rate remains at its lowest level since the early 1980s and it’s entirely likely that the participation rate will continue to decline in the coming decade. This article presents a chart on decomposition of labor force participation rate decline that will put things into perspective.

The chart below gives the labor force participation decomposition from the first quarter of 2009 to the fourth quarter of 2015.

Labor Force Participation Rate Decomposition For United States

It is clear from the chart that demographic trends have been the biggest factor during this period that has contributed to decline in labor force participation rate. This trend is likely to sustain as the peak of the baby-boom generation retires.

Also, the decomposition of labor force participation rate indicates that cyclical effects are waning and I expect this positive trend to sustain, but might not be enough to offset the demographics factor in the coming years.

The residual factor also remains significant and includes longstanding downward trend in participation among prime-age workers. According to the Economic Report of the President for 2016, this also includes other cycli­cal factors, such as the high levels of long-term unemployment in the Great Recession that are not fully captured in the unemployment rate.

Therefore, the residual factor also has to do with recession and sluggish economic growth for a prolonged period.

The reason for elaborating and discussing this decomposition of the labor force participation rate is to underscore the point that the working population will continue to decline in the United States in the coming decade and this is likely to have an impact on per capita consumption. A small workforce has to support (directly or indirectly) a higher number of dependents.

This makes me believe that consumption as a percentage of GDP peaked out prior to the financial crisis of 2008-09 and it is unlikely that it reaches those levels even in the next decade. I see sustained sluggish economic growth as one of the implication of this labor force participation trend.

Disclosure: None.

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