How the Shrinking of the Labor Force Might Impact Your Community

One trend that will continue to affect the future of economic and workforce development in the United States at a local, state and national level in the coming years is the status—continued decline or possible increase—of the labor force participation rate. This rate impacts the vitality of local and state economies and has many national implications as it continues to fluctuate. Many experts debate the future of this rate. As baby boomers retire, many expect the rate to continue to decline. But with the likelihood of better economic times and improved job prospects ahead, more people may re-enter the labor force.

Throughout the Great Recession, the labor force participation rate declined. In July 2014, the rate was at 62.9 percent. To put this into perspective, the last time the rate was this low was in March 1978, when it stood at 62.8 percent. From January to April 2000, the rate peaked at 67.3 percent. The lowest recorded rate was in December 1954, when only 58.1 percent of Americans were considered to be in the labor force. From 2000 to July 2014, the rate dropped by 4.4 percent. If the American labor force shrinks by the same rate in the next decade, the U.S. will be back to a rate equivalent to the 1950s. (See Figure 1.¹) Given the demographic changes to the labor force in the past 50 to 60 years, it is almost unimaginable that the U.S. could see labor force rates equivalent to the years following World War II.

FIGURE 1

Civilian Labor Force Participation Rate

SOURCE: Bureau of Labor Statistics, U.S. Department of Labor

NOTE: Shaded areas indicate U.S. recessions

Why Are People Leaving the Labor Force?

According to the Federal Reserve Bank of Atlanta, there are many factors that influence whether a person aged 16 years or older is in the labor force at any given time. One of the biggest reasons is retirement. Others may include being in school, having a disability or illness, taking care of someone with an illness, or giving up on looking for a job. Figure 2 provides estimates for the percentage of people out of the labor force for each of these reasons from 2007-2013.²

The labor participation rate could continue to drop as many people who are aging in the workforce retire and more adults are enrolled in higher education, which keeps them out of the workforce. But the positive data is that approximately 32 percent of people who are not currently in the workforce would like to be, as shown in Figure 2.² As the economy improves, so may the number of people working, which should have more of an impact on economic growth. The more people work and spend money, the better the economy.

FIGURE 2

Contributions to Change in Not in the Labor Force, Q4 2007–Q4 2013, by Reason

SOURCE: Terry, Ellen. What Accounts for the Decrease in the Labor Force Participation Rate? January 17, 2014. http://macroblog.typepad.com/macroblog/2014/01/what-accounts-for-the-decrease-in-the-labor-force-participation-rate.html.

State- and Community-Level Impact

Lack of participation in the labor force has an impact on the local economy, tax base and workforce. Much attention is focused on the current levels of unemployment, which have continued to decline in most regions. But more attention focused on boosting a region’s workforce may be imperative for the future of many areas, especially those that continue to see outmigration. Workforce development initiatives that focus on continually upgrading workers’ skills to keep them relevant in the workforce, creating incentives for dislocated workers to re-enter the workforce and increasing collaboration with businesses will become even more imperative to local economic development if the labor force participation rate continues to decline.

One factor that contributes to the number of workers in the labor force is the overall population of an area. Figures 3¹ and 4¹ show the civilian labor force by state and county in 2013. As the maps indicate, many of the less-populated areas have a lower number of people in the labor force. Tables 1-4 list the 10 states and counties with the greatest and least number of people in the labor force in 2013.

What may be more compelling is the change in the labor force from 2012 to 2013. Which states and counties are gaining workers and which are losing them? Figures 4¹ and 5¹ show the percentage change in the workforce from 2012 to 2013 throughout the U.S. Tables 5-8 show the states and counties with the greatest percentage of increase and decrease in the labor force from 2012 to 2013.

As the data in the maps show, labor force participation is not equal throughout the U.S. or even within a particular state, as evidenced by the state of Texas. While Texas has the second-highest number of workers in the labor force, the third-highest increase in labor force participation, and five of the top 10 counties with the largest increase in labor force participation, the state also has four of the counties with the top 10 largest decrease in labor force participation in 2013. These variances show how complex it is to improve the labor force participation rates in the United States. Each state, county and community is likely to be dealing with very different issues, requiring tailored solutions.

Businesses depend on skilled labor to make decisions regarding growth and location. If an area is lacking in the number of people who are in the labor force, many of the local economic development initiatives will not be met due to its low labor participation rate. As unemployment rates decline in many areas, community and economic developers must still pay attention to other rates, including the labor force participation rate, to improve the economic conditions in their regions. If the labor force participation rate continues to decline, attracting workers will become an even greater issue for economic competitiveness.

In August 2014, Fed Chair Janet Yellen spoke about labor market dynamics and monetary policy.³ She said, “As an accounting matter, the drop in the participation rate since 2008 can be attributed to increases in four factors: retirement, disability, school enrollment, and other reasons, including worker discouragement. Of these, greater worker discouragement is most directly the result of a weak labor market, so we could reasonably expect further increases in labor demand to pull a sizable share of discouraged workers back into the workforce.”

Labor force participation rates have a significant impact on a region’s economic vitality. Although many areas of the country are seeing growth, not all are experiencing the same growth, as evidenced by the differing labor force participation rates in different markets. But as the national economy improves and workers return to the labor force, we can create a more robust future workforce in our states and counties.

FIGURE 3

2013 Civilian Labor Force by State (thousands of persons)

TABLE 1

States with the Highest Number of People in the Workforce, 2013 (seasonally adjusted)

State	Persons in workforce (thousands)
California	18,596.0
Texas	12,818.1
New York	9,635.8
Florida	9,431.5
Illinois	6,552.5
Pennsylvania	6,459.8
Ohio	5,764.9
Georgia	4,767.0
Michigan	4,706.2
North Carolina	4,695.0

TABLE 2

States with the Lowest Number of People in the Workforce, 2013 (seasonally adjusted)

State	Persons in workforce (thousands)
Wyoming	306.3
Vermont	351.4
Alaska	364.2
District of Columbia	370.4
North Dakota	400.6
Delaware	443.0
South Dakota	448.4
Montana	513.6
Rhode Island	555.6
Hawaii	648.8

FIGURE 4

2013 Civilian Labor Force by County (thousands of persons)

TABLE 3

TABLE 4