By Logan Galimi
Most states and the District of Columbia experienced a decline in their labor force participation rates since even well before the onset of the COVID-19 pandemic. In fact, the trend of declining labor force participation started in the late 90s.
Between February 2020 and April 2020, 47 states and the District of Columbia experienced declines, with a median change of -2.5 percentage points. Despite economic recovery in recent years, 35 states still saw net declines between February 2020 and November 2023, with a median change of -0.5 percentage points. By comparison, all states — excluding the District of Columbia — experienced a decline from 1999 to 2022. The median change during this period was over 10 times greater at -5.2 percentage points.
Rather than a new phenomenon, the decline of states’ labor force participation rates is a structural trend. Although this decline does seem to come with novel challenges, it simultaneously reflects a return to participation rates even further in the past: the 1970s.
The labor force participation rate is the percentage of the civilian noninstitutionalized population that is either working or actively looking for work. The civilian noninstitutionalized population includes those aged 16 and older who are not active-duty military and are not living in, or confined to, institutions such as residential care facilities or prisons.
According to the St. Louis Federal Reserve Bank, the labor force participation rate (LFPR) “is one of many important statistics to look at when examining the overall health of the labor market.” Specifically, the number of participating people declines so there is a negative impact on the overall economy. States’ current lower participation rates are primarily due to long-term demographic trends, particularly an aging workforce and more people retiring. States aiming to address labor force participation should seek to understand and address these long-term trends.
Importance
The San Francisco Federal Reserve Bank explained that “a participation rate … at or above its potential rate or so-called long-run trend is a signal that the labor market is at or above full employment.” According to Richmond Federal Reserve Bank, full employment is when almost anyone seeking work can find employment at the prevailing wage, which is often a desirable outcome for states. Furthermore, the Philadelphia Federal Reserve Bank explained the “potentially severe” consequences of low or nonparticipation in general.
All else being equal, income tax revenues would draw from a smaller base of working people and be spread more thinly to pay for programs, like state pension systems. In response, this could force states to raise taxes, limit services or take other measures to offset the shortfall.
Current Rate and Trends
The national trend in labor force participation has an inverted-“U” shape, with a peak of 67.1% around 1999. The annual rate in 2023 was 62.6%, almost the same as in 1976 at 61.6%. From 1976 to 2023, there was a net 1 percentage point change in the labor force participation rate. However, looking at more recent history, there was a 4.5 percentage point decrease from 1999 to 2023. Even more recently, the COVID-19 pandemic saw the LFPR decrease from 63.3% in February 2020 to 60.1% in April 2020, which recovered to 62.5% by November 2023.
Almost all state labor force participation rates match the national trend. 1976 is the earliest date for which Federal Reserve Economic Data is reported for states. That year, the first and third quartile of states had LFPRs between 60.7% and 64.7%, with a median of 63%. By 1999, states had higher LFPRs. The median was 68.3%, and the middle half of states had LFPRs between 65.9% and 70.4%.
LFPRs approximately returned to 1976 levels by 2023, with a median rate of 62.7% and half the rates between 60.5% and 65.2%. All states except for Hawaii and Nevada experienced increases from 1976 to 1999, and all states except for the District Columbia experienced decreases from 1999 to 2023.
Causes for Lower Labor Force Participation Rates
The U.S. Census Bureau cited several reasons for lower LFPR, including:
“Conventional wisdom about falling labor force participation rates is that discouraged workers are dropping out of the labor force. But that conclusion can be misleading, especially when the country is experiencing significant demographic shifts, such as changes in the age distribution of the U.S. population the last decade. As a result, demographic changes rather than economic and labor market conditions may be the driving factor behind labor force participation and unemployment rates.”
In fact, the San Francisco Federal Reserve Bank found that between 2019 and 2022, changes in demographics, including an aging workforce, caused the drop in LFPR. Experts also estimate the aggregate trend LFP will decline by about one percentage point over the next decade.
The labor force participation rate returned to a rate lower than before the pandemic, although this was to be expected because of an increasingly larger older population. This echoes the Philadelphia Federal Reserve Bank’s 2017 sentiment that “the largest demographic factor influencing participation now is the aging of the population and the start of retirement for the baby boom generation.” Older individuals are less likely to participate in the workforce for a variety of reasons, including retirement, accumulated wealth, pandemic health concerns and others. Therefore, an aging population means that a larger segment of the population is not working, decreasing the overall labor force participation rate.
The effects of an aging and retiring population on the labor force participation rate persist even though most of the workforce — those aged 25 to 54 — have been working at levels higher than in the past. Both those over age 54 and 20- to 24-year-olds are working at similar levels to the 1970s. However, this represents an increase in participation since the 1980s for older individuals and a decrease in participation since the 1980s for those who are younger.
Meanwhile, the youngest individuals, those aged 16 to 19, are working at historical lows, potentially due to many of these younger adults are choosing to continue education longer. This decreases labor force participation rate for the younger demographic, but increases it over time because educated workers are more likely to participate, and be more productive, in the labor force.
Institutions have been predicting a decline in labor force participation based on these factors for years. For example, in 2006, the Board of Governors of the Federal Reserve System identified an aging baby-boomer population, as well as young adults focusing on education, as major contributors to a net decline in labor force participation rate for “some time.” They further noted that a stall in women’s participation “after more than three decades of steady rise,” and continued gradual decline of men’s participation, would contribute to a net decline, a statement echoed in 2017 by the Philadelphia Federal Reserve Bank.[1] As the Board of Governors aptly concluded, “any future cyclical fluctuations in participation will take place around a declining trend.”
Mitigation
A small labor force may lead to limited work capacity for goods production. Some strategies may reduce, but not eliminate, this projected decline in participation and output. For example, the International Economic Development Council, which serves economic developers, suggests:
- Facilitating child care for working parents.[2]
- Encouraging worker and family-friendly business practices.
- Providing transportation.
- Assisting justice-involved citizens.
- Engaging youth.
- Addressing the benefits cliff.
- Assisting veterans and military families.
- Creating opportunity in economically challenged neighborhoods
For example, the development council said employee turnover costs and absences, specifically due to child care costs, can cause millions in losses to state economies. Facilitating child care could make it easier for parents to work, reduce parental absenteeism and employee turnover, and increase the labor force participation rate. It could also reduce the cost of having children, which may allow interested individuals to have kids who may enter the labor force and eventually push LFPR up.
Organizing transit systems, especially in suburban areas, could elevate state LFPRs by allowing individuals to better connect to employers and workplaces. As a final example, the development council identified the challenge of “benefits cliffs,” which occur “when a worker receives an increase in income or wages that results in a decrease in public assistance, and an accompanying decline in net financial resources.” This poses a challenge to businesses hiring or promoting workers at risk of falling off a benefits cliff. Read more about states’ responses to benefits cliffs here.
Other nonpartisan experts and organizations, such as S&P Global, the International Monetary Fund, regional federal reserve banks and the National Academy of Sciences suggest increased international migration could mitigate a declining labor force participation rate.[3] The National Academy of Sciences and the Philadelphia Federal Reserve Bank also noted how it can complement, rather than replace, the skills of existing workers.
As the Philadelphia Federal Reserve Bank elaborated, researchers found that a “1 percentage point increase in the share of foreign workers in science, technology, engineering and mathematics actually results in a 7 to 8 percentage point increase in the wage growth of college-educated native workers” and a 3 to 4 percentage point increase for non-college-educated native workers. The logic for why international migration can help states’ economies parallels why population growth is theorized to facilitate economic growth: “The more people, the more ideas, the more growth.”
[1] Since 1948, the earliest year for which FRED reports data, men's labor force participation rate decreased 18.5 percentage points, although this was more than offset by the increase in women’s LFPR: 24.6 percentage points. See Federal Reserve Economic Data (FRED) for more detailed graphs on labor force participation rate by gender, race and gender and race.
[2] Also see the U.S. Chamber of Commerce, Understanding America’s Labor Shortage (2024).
[3] For International Monetary Fund perspectives, see Grigoli et al. (2018) and Peri (2020). For viewpoints from regional federal reserve banks, see the Philadelphia Federal Reserve Bank (2017) and Dallas Federal Reserve Bank (2019). Also see Burgess et al. (2021).