Dramatic decline in labor force participation

Michael Mandel at “Economics Unbound” is really interested in labor force participation rate (LFPR). He devoted couple previous posts to related problems in an attempt to explain the evolution of labor force participation rate and productivity by some modern and fancy reasons. It is not worth to repeat his posts here and I just refer to Figure 1 as a general argument against any short-term force driving LFPR. The overall trajectory has a very clear picture of secular oscillations. Between 1965 and 2000, the LFPR was growing with just minor plateaus near 1980m and 1990. After 2000, the LFPR has been declining. This is a robust downward trend which hardly to be compensated by innovations, as Michael suggests.

In 2009, the LFPR has decreased from 66% to 65.4% in Q3 with average over the three quarters of 65.6%. A 0.6% drop in LFPR is a dramatic one. It corresponds to ~2,000,000 people leaving labor force in the US almost at once! (It is worth noting that such a drop may severely affect the rate of unemployment because people without job are more likely to leave labor force). According to our model [1], this the decline in the LFPR was expected in 2010. However, the population estimates, which are used for the prediction, have never been accurate enough for sharp timing. In any case, the model developed in [1-3], which links LFPR and productivity in developed countries to real GDP per capita has proved its consistency. The next two to three years should serve for further validation, as Figure 2 assumes.

Figure 1. The evolution of LFPR between 1960 and 2009.
Figure 2. The observed LFPR and that predicted from real GDP per capita. We expect the LFPR to fall down to 64.5% by 2013.

The observed increase in productivity is directly related to the decrease in the LFPR. As a consequence, it was also well predicted by our model in [2]. We used the projection of the number of 9-year-olds from the number of 1-year-olds for the prediction of real GDP per capita in the 2010s. Since 2010, the productivity has to be growing, as Figure 5 in [2], demonstrates.


Figure 5. Prediction of the number of 9-year-olds by extrapolation of population estimates for younger ages (1- and 6-year-olds).
a) Total population estimates. The time series for younger ages are shifted ahead by 8 and 3 years, respectively.
b) Change rate of the population estimates, which is proportional to the growth rate of real GDP per capita. Notice the difference in the change rate provided by 1-year-olds and 6-year-olds for the period between 2003 and 2010. This discrepancy is related to the age-dependent difference in population revisions.
A downward trend in productivity, as has been observed since 2003, will turn to an upward one in the 2010s. This also means an elevated growth rate of real GDP per capita during the period between 2010 and 2017.


[1] Kitov, I., Kitov, O., (2008). The Driving Force of Labor Force Participation in Developed Countries, Journal of Applied Economic Sciences, Spiru Haret University, Faculty of Financial Management and Accounting Craiova, vol. III(3(5)_Fall), pp. 203-222. http://www.jaes.reprograph.ro/articles/3_TheDrivingForceofLaborForceParticipationinDevelopedCountries.pdf

[2] Kitov, I., Kitov, O., (2008). The driving force of labor productivity, MPRA Paper 9069, University Library of Munich, Germany, http://ideas.repec.org/p/pra/mprapa/9069.html

[3] Kitov, I., Kitov, O., (2009). Modelling and predicting labor force productivity, MPRA Paper 15152, University Library of Munich, Germany, http://mpra.ub.uni-muenchen.de/15152/01/MPRA_paper_15152.pdf

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