Factors Affecting the Labor Force Participation of People Ages 25 to 54
This report examines how various demographic factors relate to labor force participation, how economic conditions are likely to affect that rate over the next decade, and what keeps people from participating in the labor force.
Between 1990 and the 2007–2009 recession, the rate of labor force participation—the percentage of noninstitutionalized people who have jobs or are available for work and are seeking jobs—was relatively stable for individuals ages 25 to 54. People of those ages are typically finished with schooling but not yet near retirement age and as a group have the highest participation rate in the labor force.
Between the end of the recession and 2015, however, the rate fell by 2 percentage points, from 83 percent to 81 percent. Although the rate inched up slightly in both 2016 and 2017, it is likely to stay about the same between 2018 and 2027, CBO estimates. Most of the changes since 1990 in the labor force participation rate have been related to demographic factors, economic conditions, and the government’s fiscal policies.
Labor force participation varies with people’s demographic characteristics, such as sex, year of birth, education, marital status, and the presence of young children at home. Trends in labor force participation within demographic groups combined with changes in demographic characteristics of the population help to account for shifts in the overall labor force participation rate. For example, since about 2000, the labor force participation of people without a college degree has declined, but the effect of that decline on the overall labor force participation rate is lessened because the share of the population without a college degree has decreased. (Although age is an important factor in the labor force participation of people younger than 25 or older than 54, it is not an important factor for people between those ages.)
Economic conditions and fiscal policies also affect labor force participation. Recessions tend to push labor force participation down relative to its potential, an effect that lingers for several years even after they end, in CBO’s judgment. The recovery of labor force participation following the 2007–2009 recession has been especially slow. Some fiscal policies, such as the earned income tax credit (which subsidizes the earnings of certain low-income workers), tend to increase labor force participation whereas others, such as the Social Security Disability Insurance (DI) program, are associated with lower labor force participation.
People report various reasons for not participating in the labor force. For example, many people, particularly men, report that they are not working because of an illness or disability. Many women report being out of the labor force because they are caring for a family member.
Changes in labor force participation have significant economic and budgetary implications. A lower labor force participation rate is associated with lower gross domestic product (GDP) and lower tax revenues. It is also associated with larger federal outlays, because people who are not in the labor force are more likely to enroll in certain federal benefit programs.
How Do Demographic Factors Relate to Participation in the Labor Force?
This analysis examines seven demographic factors that are related to overall labor force participation. They are presented here roughly in order of the strength of their relationship to the overall labor force participation rate of people ages 25 to 54. (Some of the factors have very strong relationships to labor force participation but are relevant for only small populations and therefore have less of an effect on the overall rate.) Both the demographic composition of the population and the relationship between each demographic factor and labor force participation can change over time.
- Sex. Men are more likely to participate in the labor force than women, although their rate of participation fell by 5 percentage points (from 93 percent to 88 percent) between 1990 and 2017. In contrast, the rate for women was the same at the start and end of that period—at 74 percent—though it fluctuated by several percentage points in the intervening years. Between 2018 and 2027, CBO projects, the labor force participation of men will decline slightly and the participation of women will increase very slightly, leaving the combined participation rate little changed at roughly 81 percent.
- Birth Cohort. Participation in the labor force varies by a person’s year of birth. For example, men born in the 1920s and 1930s (who thus are part of the 1920s–1930s birth cohort) were ore likely to participate in the labor force at any given age between 25 and 54 than men born in later periods. Conversely, women born in the 1920s and 1930s were less likely to participate than women born in later periods. Some of the differences in participation rates are explained by demographic characteristics and economic conditions that varied over time. The remaining differences are attributed to unobserved characteristics that are specific to a birth cohort. For instance, shifting social norms probably help to explain women’s increased rate of labor force participation before 2000. Some of those differences are not well understood. For example, it is unclear why each successive cohort of men has participated less in the labor force than its predecessors did.
- Education. People with more education are likelier to participate in the labor force than people with less education. In 2017, the participation rate of men ages 25 to 54 with at least a college degree was 9 percentage points higher than the rate for men without a college degree. For women, the difference was 13 percentage points. For both sexes, since about 2000, the difference in labor force participation between people with more education and people with less education has grown. Between 1990 and 2017, the share of men with at least a college degree increased from 27 percent to 33 percent and the share of women with at least a college degree climbed from 23 percent to 38 percent. In CBO’s estimation, those shares will continue to increase, boosting labor force participation higher than it would be if educational attainment did not rise over time.
- Race and Ethnicity. Labor force participation differs by racial and ethnic group. From 1990 to 2017, black men ages 25 to 54 were less likely than other men of those ages to be in the labor force. Among women, Hispanic women between ages 25 and 54 were least likely to be in the labor force, and white and black women were more likely. Over time, the share of men and women (combined) ages 25 to 54 that is Hispanic has increased, pushing up the average labor force participation rate for men and pushing it down for women. The share of the population that is Hispanic will continue to rise through 2027, CBO estimates. That increase is likely to have only a small effect on the overall labor force participation rate.
- Disability. People with disabilities generally have lower labor force participation than people without disabilities. One measure of the prevalence of disability is the share of people who receive benefits from the Social Security Disability Insurance program. (That measure does not reflect all people with disabilities.) The DI program pays cash benefits to people who have worked in the past but are judged to be unable to continue performing substantial work because of a disability. DI beneficiaries may do only a limited amount of work while receiving benefits. The share of the population between ages 25 and 54 that receives DI benefits increased between 1990 and 2012 before falling slightly. The increase was especially large for people without a college degree.
- Marital Status. The relationship of marital status to labor force participation differs for men and women. Married men are more likely to participate in the labor force than men who are not married, whereas married women are less likely to participate than their unmarried counterparts. The 1990–2017 decline in the share of the population between the ages of 25 and 54 who are married was associated with a decrease in the labor force participation of men and an increase in the labor force participation of women.
- Presence of Young Children at Home. Having children under the age of 5 at home is related to the labor force participation of women but not men and varies with marital status. Married women with young children are less likely to work than married women without young children, whereas unmarried women with young children are more likely to work than unmarried women without children. The share of women, either married or unmarried, with young children has decreased since 1990. In recent years, that decrease has pushed up the labor force participation of women (both married and unmarried) from what it otherwise would have been.
Some of those demographic factors are influenced by federal policies. For example, education policy has affected the education of the population, and immigration policy has affected the racial and ethnic composition of the population. Those effects in turn have an impact on the rate of labor force participation.
Federal policies also affect the labor force participation rate directly, and the effects vary by demographic factor. For example, the earned income tax credit substantially pushes up the labor force participation of single mothers without a college degree but has only a slight effect on the participation of married women with college degrees. Similarly, under current law certain provisions of the Affordable Care Act (ACA) tend to raise effective tax rates, thereby reducing workers’ take-home pay and potentially discouraging labor force participation. Those effects vary with income, which partly depends on education, marital status, and the presence of young children.
How Will Economic Conditions and Fiscal Policies Affect Labor Force Participation Over the Next Decade?
During periods of economic weakness, a lack of good job opportunities both discourages some people from searching for employment—because they believe that they could not find a job even if they looked—and encourages some people to instead pursue other activities, such as staying at home to care for a family member. As a result, the labor force participation rate tends to decline during economic downturns and rebound during recoveries.
The lingering effects of the 2007–2009 recession and the ensuing weak recovery held down the labor force participation of people ages 25 to 54 and will continue to restrain participation slightly through about 2020, in CBO’s view. At that time, CBO estimates, the labor force participation rate of people ages 25 to 54 will be close to its potential rate (that is, the percentage of the population who would be employed or seeking work if the economy was producing its maximum sustainable amount of output), indicating that most of the effects of the recession will have subsided.
The slow recovery of the labor market largely reflects lackluster demand for goods and services and hence slow growth in GDP. The deep contraction in the demand for goods and services caused sharp increases in unemployment and, subsequently, in the number of workers unemployed for long periods. The lack of available jobs during the recession and the ensuing slow recovery probably discouraged many people who had been unemployed for more than six months, causing them to stop searching for a job (and thus exit the labor force). As the labor market improved and jobs became more plentiful, some of those discouraged workers reentered the labor force. CBO expects that discouraged workers are likely to continue to reenter the labor force as more people find jobs and as wage growth increases.
Although this report does not disentangle the effects of federal tax and spending policies from the broader category of economic conditions, CBO expects some of those policies to affect labor force participation over the next 10 years by changing some people’s take-home pay. For instance, provisions of the Affordable Care Act tend to reduce labor force participation rates. And the structure of the tax code, which pushes some people with rising income into higher tax brackets over time (a process known as real bracket creep), will also tend to lower participation rates.
What Keeps People From Participating in the Labor Force?
People who are out of the labor force report various reasons for not looking for a job. Those having an illness or disability (one that may or may not qualify them for DI benefits) that makes it difficult or impossible to find and keep a job; retirement; and being discouraged from seeking a job because they do not believe they could find one with a suitable wage. Since at least 1990, illness or disability has been the primary reason that men have been out of the labor force. For women, the primary reason has been to care for a family member.
Although people who are in prison or jail are not part of the civilian noninstitutionalized population and are therefore not included in the measure of the labor force participation rate, increases in incarceration, especially among men, have contributed to some of the decline in labor force participation over time. Increases in incarceration push down the labor force participation rate because people who have been incarcerated are less likely than others to be employed in the future, for two reasons: They have a more tenuous connection to employment, and they have a criminal record, which employers generally avoid. (However, in the short term, incarceration may boost the labor force participation rate by removing people who are less likely to participate from the pool of potential participants.)
What Effects Does Labor Force Participation Have on the Economy and the Budget?
Labor force participation is an important component of economic growth: As more people participate in the labor force, firms are able to expand employment and increase production. CBO estimates that growth in potential (that is, maximum sustainable) output over the next decade will be faster than it has been since the 2007–2009 recession, in part because of the projected stability—after a sustained decline—of the labor force participation rate for people ages 25 to 54. (However, that growth in potential output is projected to be slower than the average growth over the 1980s, 1990s, and early 2000s.)
Greater labor force participation is associated with higher tax revenues because the number of employed people, and therefore the number of people paying income and payroll taxes, tends to rise. It is also associated with lower spending on means-tested programs (which provide cash payments or other forms of assistance to people with relatively low income or few assets), such as Medicaid, and on refundable tax credits.
Changes in the labor force participation rate can distort the significance of the unemployment rate—that is, the share of people in the labor force without a job—as a measure of the health of the economy. For example, between the end of the 2007–2009 recession and 2017, the unemployment rate for people ages 25 to 54 fell by 4.5 percentage points even though the share of that population with a job increased by just 3 percentage points. The unemployment rate declined partly because of an increase in the share of the population that was employed but also because of a decrease in the labor force participation rate.
Why Did CBO Focus on People Ages 25 to 54?
The experience of people ages 25 to 54—who, in 2017, accounted for nearly two-thirds of the labor force—gives a clearer indication of the health of the labor market than the experience of all people ages 16 or older because it minimizes the effect of the aging of the population on labor force participation. The labor force participation rate for both groups declined between the 2007–2009 recession and 2017, but the most important factor contributing to that decline in the broader population was the aging and retirement of members of the baby-boom generation (people born between 1946 and 1964). In contrast, aging and retirement were not important factors in the decline in participation among people ages 25 to 54.