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Fewer Workers Could Lead to Lower Standard of Living: St. Louis Fed Analysis

1/14/2008

ST. LOUIS — While there are more people currently participating in the U.S. labor market than ever before, most studies estimate that the rate of growth of the labor force will decrease over the next decade, which could mean fewer workers generating goods, services and income. And that, in turn, could lead to a drop in our standard of living.

Economists Riccardo DiCecio, Michael T. Owyang, Christopher H. Wheeler and researcher Kristie M. Engemann looked at changing trends in the labor force for the January/February issue of Review, the Federal Reserve Bank of St. Louis' bi-monthly journal of economic and business issues.

The publication is also available online at the St. Louis Fed's web site: https://research.stlouisfed.org/publications/review.

One of the primary indicators of the state of the U.S. labor market is the labor force participation rate (LFPR). Economists find the LFPR to be a useful complement to other indicators, such as employment and the unemployment rate, in evaluating labor market conditions.

Although the LFPR is constantly in flux, it increased dramatically over the post-World War II period. In spite of a long-run rise, there has been a modest drop in the overall participation rate within the past six years. "If this decrease represents a change in the trend of LFPR," DiCecio, Engemann, Owyang and Wheeler wrote, "the U.S. economy may be faced with fewer work-oriented individuals per residents in the coming decades."

The researchers found that a substantial portion in the rise in the aggregate LFPR, which began in the 1960s, can be attributed to the increased participation by women in the labor force, particularly married women. DiCecio, Engemann, Owyang and Wheeler cited several possibilities for this trend, including improvements in labor-saving household technologies that have streamlined many day-to-day tasks such as cooking and cleaning, "thereby giving women greater time to pursue work outside the home."

One of the most important demographic changes affecting the LFPR is the approximately 78 million baby boomers who have reached the latter stages of their working lives. A countervailing trend that partially offsets their exit is a steady rise in the participation rate among people 55 and older. Some studies theorize that this trend may be due to a number of reasons, such as workers having to work longer to receive full Social Security benefits or to maintain health insurance coverage.

At the other end of the age spectrum, teenagers' participation in the labor force has declined as well. Again, economic studies have offered several explanations. "Because teen workers have a weak attachment to the labor market, they are particularly sensitive to economic downturns," wrote DiCecio, Engemann, Owyang and Wheeler. They also noted another study which suggested that teenagers may be staying out of the labor market in favor of acquiring more education.

The third demographic feature influencing the LFPR is the ethnic and racial diversity of the U.S. population over the past several decades. Hispanic men, for example, tend to have higher participation rates than either white or black males; this is likely because Hispanics tend to be younger than the general population. Participation rates among women of all racial groups showed increases between 1980 and 2000. Hispanic women, however, tended to have the lowest participation rates while black females tended to have the highest.

The authors concluded that the principal challenge in the face of a declining LFPR will be to find ways to enhance the productivity of those individuals who choose to work. "Investing in education, physical capital accumulation, and research and development may be three avenues to such an end," they wrote.

With branches in Little Rock, Louisville and Memphis, the Federal Reserve Bank of St. Louis serves the Eighth Federal Reserve District, which includes all of Arkansas, eastern Missouri, southern Indiana, southern Illinois, western Kentucky, western Tennessee and northern Mississippi. The St. Louis Fed is one of 12 regional Reserve banks that, along with the Board of Governors in Washington, D.C., comprise the Federal Reserve System. As the nation's central bank, the Federal Reserve System formulates U.S. monetary policy, regulates state-chartered member banks and bank holding companies, and provides payment services to financial institutions and the U.S. government.

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