Describing the methods used to produce CBO’s projections of labor force participation rates, this paper examines the recent trends in the overall and prime-age labor force participation rates and whether those trends persist over 10 years.
By Joshua Montes (CBO)
As part of its responsibility for producing baseline projections of the economy and the federal budget, the Congressional Budget Office regularly produces estimates and projections of labor force participation rates. Those projections serve as a key input to CBO’s estimate of potential output and the agency’s macroeconomic forecasts and budget projections. This paper describes the methodology used to produce CBO’s projections of labor force participation rates.
The paper further examines the factors behind the recent trend decline in the overall and prime-age labor force participation rates and whether CBO expects those declines to persist over the next decade. Persistent weakness in the labor market following the 2007–2009 recession reduced the overall labor force participation rate by as much as 1.2 percentage points and the prime-age rate by as much as 1.3 percentage points. A strengthening labor market has pulled some workers back into the labor force in recent years, and further cyclical increases are estimated to occur in both the overall and prime-age rates over the next few years.
The estimates show, though, that the vast majority of the recent decline in the overall rate stems from the aging of the baby-boom generation into retirement, and CBO expects aging to cause further declines in that rate over the next 10 years. The recent decline in the prime-age rate is entirely unrelated to aging, and CBO expects that downward trend to stop over the next decade, as increases in educational attainment outstrip further declines in the participation rates of less educated, prime-age individuals.