Cyclical versus Secular: Decomposing the Recent Decline in U.S. Labor Force Participation
Since the start of the Great Recession, one of the most striking developments in the U.S. labor market has been the pronounced decline in the labor force participation rate. The crucial issue in interpreting the decline in U.S. labor force participation is how much of the decline reflects cyclical factors and how much reflects more persistent developments such as the demographic effects of an aging population. We provide a decomposition of cyclical versus trend movements in the labor force participation rate, informed by the joint dynamics of this variable with the employment-to-population ratio. We find that since 2008 trend movements account for a significant portion of the decline in labor force participation. The cyclical response of the labor force participation rate over most of the Great Recession and ensuing recovery has been smaller than usual given the estimated cyclical behavior of the employment-to-population ratio. If the cyclical behavior of the labor force participation rate had followed historical norms, the unemployment rate over the period 2009-2011 would have been lower on average by roughly three-quarters of one percentage point. At this point, however, the unemployment rate should provide a fairly accurate signal of labor market conditions and further cyclical declines in labor force participation rates are unlikely to occur if the employment situation continues to improve.