Question

The overall labor force participation rate peaked at 67.1 percent from 1997 to 2000. After the recession of 2001, it started trending downward. In the aftermath of the 2007–09 recession, the overall labor force participation rate dropped sharply and continued its decline, registering at 62.7 percent in 2015. It changed little in 2016, growing by 0.1 percentage point to 62.8 percent. As a result, from its peak in 2000, the labor force participation rate had declined by 4.3 percentage points by 2016.

1. Discuss economic theory related to the quote above. Be sure to include a definition of Labor Force Participation Rate (LFPR) within your discussion.
2. Locate and incorporate outside research that gives evidence and explanation as to the possible causes of these declines in the Labor Force Participation rate.

Answer 1

Labour force participation rate tells us how much economically current active labour force is there in the economy. The labour force includes both employed and unemployed labours.

The Eligible population however includes people above 16 years and does not include people who are institutionalised ( they are in prison ) Or in Active military duty.

So LFPR = Labour force / eligible population * 100 is the formula for calculating the same

In order to answer this question we have to understand how demographics has worked throughout the economy. This is known as the demographic transition from which an economy goes through.

At first We have high birth rates and death rates, then with the advent of good health system, we have lower death rates and we eventually come to a point where we have lower birth rates and death rates.

Now women do play a crucial role here. As our economy progressed and we had lower birth rates and people started giving education a lot more importance, Women's had less babies to deal with ( to take care of them) and they were becoming educated enough to join the labour force. Hence from early 1990's to 2000's we saw a huge influx of women in the labour force increasing the labour force participation rate.

Now as we discussed about demographics transition, we already were in a state where we had Low birth rates and low death rates, hence one can say due to lower birth rate there was no new population joining the labour force at a faster rate and there were lots of retirement that was taking place and to be precise the number of people who were retiring were more in numbers than the number of babies born.

Also as income rose, people started giving education a lot more importance. Hence from 2000-2016 we can see that the school enrollment ratio was quite high and also the number of years of schooling also rose as people wanted to be more educated and get a high salaried job. Hence we did observe a delay in the labour force participation as many were not willing to participate.

However in 2016 we did observe that the unemployment rate was fairly stable and hence we can say that people who were doing job did not lose it. On top of that many foreign students also started coming in USA for Education and they were getting absorbed by the companies in usa. Hence we saw a little increase in the labour force participation rate in 2016 by 0.1%

Even now people give higher education a lot more importance with increase in income and with the lower birth rate and increasing number of people who are retiring, we are seeing a dip in numbers even now.