Labor Force Participation Is Down. Who’s on the Sidelines?

Despite low unemployment and a war for talent, labor force participation is down. Here’s a look at the types of people sitting out.
Labor participation workforce economy

Despite record-low unemployment, labor participation — the number of being not working or actively looking for work — is also on the decline. Prerecession levels were in the 66 percent range, but labor participation today hovers around 63 percent, according to the U.S. Bureau of Labor Statistics data.

Much attention is placed on why employment among people of prime working ages fails to rise, said Josh Wright, chief economist at iCIMS, an HR software company in Matawan, New Jersey. “No one knows for sure what’s holding them back, but it sure looks like something is broken in the on-ramps to the labor force — especially given how strong overall growth has been and how many jobs are being created.”

In December 2017, the unemployment rate of those who have a college degree was 1.8 percent, according to the Federal Reserve Bank of St. Louis. Those without a high school diploma faced unemployment at a rate of 6.3 percent.

“If you have the right skills and abilities, things are really good; in many ways, these are the best of times,” said Steve King, partner at Emergent Research, a research and consulting firm based in Lafayette, California. Without the right skills and abilities, and for those living in an economically depressed location, jobs are hard to come by and pay is low, so people get discouraged and drop out of the workforce. At a high level, the income inequality, lack of opportunity and wage stagnation — all of which are actively talked about as problems — are still issues, but individuals are making the decision that working a minimum wage job isn’t worth it, King said.

Who’s on the sidelines of the workforce?

One of the largest groups not participating is baby boomers. Many are retiring, but many still want to work, too. However, if they lose their job, it’s hard to find an equivalent one. “Companies just don’t like to hire old people, on average,” King said.

When older people want to continue working but can’t find a job, they tend to either retire or become self employed. According to the U.S. Bureau of Labor Statistics, workers 65 and older were the most likely to be self-employed (15.5 percent).

More young people attend school than in years past, leading to a drop in labor participation. Students ages 20 to 24, who focus on their education instead of work, rose from 11.3 percent to 17.5 percent between 2004 and 2014, according to the U.S. Bureau of Labor Statistics. Teenagers are also working less. Between 2004 and 2014, however, teenagers enrolled in school rose one percentage point, but the proportion of teens who cited school as the reason for not working rose 13 percent.

RELATED: Why Teens Aren’t Working — And How It Influences the Workforce

There’s another group not part of the labor market that could still be working, though potentially through the informal economy. “That’s our nice term that’s used in academia and economics for people that are working outside of the system and not paying taxes,” King said. This includes people working for cash for a variety of reasons, including criminal activity. According to the Federal Reserve Bank of St. Louis, about 16 percent of people not in the U.S. labor force are participating in the informal economy.

People on disability also tend to be out of the workforce. According to a Brookings Institute paper from Princeton University economist Alan B. Krueger, between 1967 and 2014, prime-age men on disability insurance rose from 1 to 3 percent, and their labor force participation fell by 7.5 percent, “which suggests that DI could at most account for a quarter of the decline in participation over this period.” Still, the availability of benefits is found to be responsible for less of the decline; instead, the prevalence of pain among the disabled keeps them out of the workforce, the paper says.

The effort to lessen that pain comes the issue of painkillers. Opioids can help manage pain, but they are highly addictive, posing another issue detrimental to the work and lives of those impacted. According to the same paper by Krueger, labor participation has fallen more in areas where more prescription painkillers get prescribed. Although this group isn’t a large one, compared to the overall workforce, drug dependency does impact the labor market, King said.

Another group not included in much of the workforce is those previously incarcerated. King noted that compared to the size of the workforce, this is not a huge group, though many could work. Once out of jail, it becomes difficult to find a job, even if one’s crime was a nonviolent offense. There are efforts, such as Ban the Box, to help this group find work, though removing the question of previous incarceration has increased racial biases in the hiring process.

Finally, one study found that a group on the sidelines of the labor force is young, male video gamers. The working paper from the National Bureau of Economic Research found that “leisure luxuries” explain some of the increase in downtime for young men, leading to “a decline in market hours of 1.5 to 3 percent.” More time playing video games and watching television means less time to work.

“Rippling through all of this is a bunch of people are saying the jobs I can get at the wages I can get make it so it’s not worth it for me to work,” King said.

What should employers do to fix low participation?

Employers will have to make concerted efforts to increase the labor force in the U.S.

First off, “introductory wages just have to go up,” King said. When unemployment is down to 4.1 percent, and wages have stagnated for so long, “to bring more people in is going to require a combination of companies being more clever and more flexible in who they hire, but I think wages are definitely going to have to play a role there.”

Regarding aging baby boomers, there are a couple of things that companies can do, according to King. “I think one of the clear things companies can do is to look at their hiring policies, and not just their policies; everybody’s policy says we don’t age discriminate. But you have to look at what you’re actually doing in terms of hiring.”

Also, companies can recruit more boomers by simply adding some flexibility and adjusting jobs to be less physical, he said. Still, corporations don’t want to take on the high health care costs of older workers. “I don’t have an answer for that,” King said.

To reach this group — and others — recruiters will have to make it clear that they’re hiring different people than would be expected. It takes a bit of work to show that a candidate doesn’t need to meet the classic profile of someone the company would hire.

For example, Amazon.com Inc. hired a staffing agency to help with recruiting on-demand labor. In order to attract seasonal, typically older workers, Amazon created its Amazon CamperForce, a program that provides RVers with campsites, time and a half for overtime, a completion bonus and some insurance. Through ads on RV lifestyle websites, the company can reach this cohort at a low cost, King said.

Companies must reach the workers they need to fill their open roles, but whether companies should aim to increase the labor participation rate is another story. King said he found through his interviews with business executives that they think of workforce participation as a societal issue, not a business issue. Getting them to care is a big challenge, but “they certainly benefit if it gets fixed,” he said.

Some organizations are working to increase the labor participation rate, King said. For example, Encore.org focuses on aging boomers, and the Fight for $15 aims to increase the minimum wage, which organizers say would get people back in the workforce, King noted, adding that the responsibility of increasing the participation rate is a case of the commons.

“All companies would benefit from greater workforce participation, but no individual company can drive the whole thing,” King said.

Lauren Dixon is senior editor at Talent Economy. To comment, email editor@talenteconomy.io.