Why Has The Labor Participation Rate Plunged?

Why has the percentage of the population that’s in the work force declined so dramatically? It’s a question many have asked, and Gordon T. Long and I attempt to answer in our most recent video program The Participation Rate Mystery–Solved.

Why does the Participation Rate matter? Intuitively, we all understand that the lower the participation rate (i.e. the percentage of the population with a job or actively looking for a job), the greater the tax burden on the remaining workers.

We all understand that as the number of workers supporting each retiree declines, the remaining workers will have less income to support their own families, as the rising costs of retirees must be paid with higher taxes in our pay-as-you-go social and healthcare programs such as Social Security and Medicare /Medicaid.

Where there were once around eight workers for every retiree, now the ratio is down to 2.5 workers per retiree–and the cost of providing healthcare for the elderly has soared.

For context, let’s look at a few charts of the participation rate and related metrics. Let’s start with the engine of wealth creation–productivity. The productivity of industrialized nations’ work forces topped out in the cheap-oil boom years of the 1960s.

Not coincidentally, wages as a percentage of GDP (i.e. of all economic activity) topped out around the same time: 1970.

Here’s the participation rate going back to the 1950s. I’ve noted the key developments: the mass entry of women and the Baby Boom into the work force in the late 1960s-early 1970s; the peak of financialization and debt-based speculation in the 1990s through 2007; the advent of automation capable of eating not just low-skill jobs but middle-class jobs, and the diminishing return on further financialization/speculative bubbles.

In the big picture, while the economy added jobs, workers took home a diminishing share of the economy’s expansion.

The participation rate of those in their peak earning years 25-54 has declined to the levels of the early 1980s, before the financialization/tech booms took off.