12/07/18

Is the American Labor Force Declining?

If you’re an employer, you’ve probably felt the pressures of hiring in the current market.  Yes, things are tight. And it doesn’t help that, according to a new report from the Federal Reserve Bank of San Francisco, labor force participation among key demographics is on the decline in the United States.

Researchers Mary C. Daly, Joseph H. Pedtke, Nicolas Petrosky-Nadeau, and Annemarie Schweinert provide ample evidence in their report to prove that labor force participation is declining among men and women between the ages of 25 and 54. This prime segment of the population, they say, has been on a downward trend for the past two decades.

Labor force participation

To determine the labor force participation rate (LFP) in America, researchers identify the fraction of the working-age population (age 16 and up) who are either working a job or actively looking for one. There are obviously a lot of different factors at play when it comes to these rates, but age is one of the biggest.

Think about it—a 17-year-old might have a job in the summer, but is less likely to want one during the school year. Likewise, individuals on the older end of the spectrum drag down participation rates in their segment as they retire. So when your 25 to 54 segment is struggling, it can spell trouble.

On the flip side, the labor market in Canada has seen an increase in participation among this same age group. While some of this activity may be due to the fact that Canada is the 7th happiest country on earth (and the U.S. has never even cracked the top ten), it’s mostly due to policies that help women succeed.

“Three-fourths of the difference between the two countries can be explained by the growing gap in labor force attachment of women,” states the report. “A key factor is the extensive parental leave policies in Canada. If the United States could reverse the trend in participation of prime-age women to match Canada, it would see five million additional prime-age workers join the labor force.”

When things turned south

America hasn’t always struggled like this. The participation for these prime ages rose steadily in both the United States and Canada until about 1991. And that growth was closely related to the number of prime-age women entering the labor force.

Then, the trajectories diverged in the two countries. Canada saw increases while the United States began to decline. As of 2017, the prime-age participation rate in Canada was 87%, while it was about 81% in the United States.

In an effort the get more clarity on the situation, the authors of the report broke the participation rate down by gender. Here’s what they found:

Men: Data shows that the overall participation rates in the two countries mirrored each other until the Great Recession. Men in the U.S. had a sharper decline afterwards, and they’ve been more sluggish in recovering. As of last year, there was still a 2.5 percentage point gap between prime-age male workers in the two countries.

Women: Here’s where the researchers noticed the biggest disparity. In fact, U.S. prime-age women’s participation rates began dropping in the mid-1990s, well before the Great Recession. And the participation levels among women in the two countries has consistently moved in opposite directions. Last year, the rate was 83% in Canada and only 75% in the United States.

The education factor

In addition to gender, other factors are at play when it comes to participation rates. One is education. Essentially, if a worker obtains a college degree, they’re more likely to participate than someone who only obtained a high school diploma. And those with a high school diploma are more likely to participate than those without one.

This is particularly true for women. And things really started to diverge in the late 1990s as more women began entering the workforce in Canada.

“In 2016, 87% of Canadian women with a college degree were in the labor market,” states the report. “Conversely, participation for U.S. college-educated women began to decline at the end of the 1990s and stood at 82% in 2016, 5 percentage points below college-educated Canadian women. Women with a high school education showed a similar divergence, with a 7 percentage point gap by 2016.”

Conclusion

Beyond the various cultural, demographic, and legislative differences that exist between women in the United States and Canada, what explains the stark difference in participation rates? The authors of the report believe it comes down to policies that make it easier for mothers to stay in the labor force.

In Canada, a 1988 tax reform reduced the marginal tax rate for second earners in every household. This helped boost the amount of married women doing part-time work. It was later, when Canada introduced subsidized childcare costs and parental leave that women began to really enter the labor force in droves.

If the United States can also incentivize women to stay in the labor force, enacting more generous policies for mothers, things could change. In fact, we would probably see the type of growth that has eluded the labor market for the past couple decades.

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About the author

Grant Olsen
Grant Olsen
Grant Olsen is a writer specializing in small business loans, leadership skills, and growth strategies. He is a contributing writer for KSL 5 TV, where his articles have generated more than 6 million page views, and has been featured on FitSmallBusiness.com and ModernHealthcare.com. Grant is also the author of the book "Rhino Trouble." He has a B.A. in English from Brigham Young University.

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