A publication of the Indiana Business Research Center at IU's Kelley School of Business
Share | |

Labor Force Dynamics: What Influences the Size of the Labor Force?

The unemployment rate is readily understood in society and is often the focus of interest for the media, citizenry and politicians. Despite the relative popularity of the statistic, its composition is much less known. Arriving at the unemployment rate is simple since it is calculated as the number of unemployed individuals divided by the number of persons in the labor force, with both the numerator and denominator being dynamic with respect to time. That variation, or dynamic, of the labor force is the focus of this article. Our analysis examines potential influences on the labor force to better understand the motivations behind individual movements within the labor force by forming a model to explain labor force growth and contraction. This builds upon previous work explaining instability in labor force participation.1

The study examined data collected from 2002 to 2010 (nine years of data) for the 50 states and the District of Columbia and used a fixed effects model to test for influences on labor force size. View the linked pdf with more detail about the methodology and the regression results. Unless otherwise noted, the variables discussed below are statistically significant at the 1 percent level.

Factors Influencing the Labor Force

  • Population: As expected, population increases result in labor force increases. Both the strength of the influence and the magnitude are strong. A one percent increase in state population results in a 0.74 percent increase in labor force size.

  • Income: As state incomes grow, it attracts labor force entrants hoping to take advantage. However, a state’s cost of living is shown to have no influence on labor force size and is not statistically significant.

  • Educational Attainment: A more educated society has a larger labor force.

  • Homeownership: A higher homeownership rate is associated with a slightly smaller labor force. This is likely due to reduced employee mobility since a dynamic labor force would also be mobile. Homeownership likely reduces this mobility and thus negatively impacts labor force size. Homeownership has many benefits for society, but this is one negative tradeoff.

  • State-Specific Influences: The state binaries are generally positive and indicate a statewide influence regarding labor force size. Without further data, teasing out state-specific causes is problematic. The purpose of the binary is simply to recognize these potential influences and control for them.

Conclusion

This analysis examined various influences on the size of the labor force over a nine-year period. As expected, after controlling for yearly and statewide factors, the labor force is shown to be closely tied to state population size and economic output. Higher levels of population and economic production induce higher labor force size. Personal income levels and educational attainment are shown to positively influence on labor force size, while cost of living within a state is shown to have no impact. Finally, homeownership is shown to reduce labor force size as it likely alters worker mobility patterns.

Notes

  1. R.E. Hall, “Sources and Mechanisms of Cyclical Fluctuations in the Labor Market,” Stanford University Hoover Institution and Department of Economics, National Bureau of Economic Research, 2008, www.stanford.edu/~rehall/SM022208.pdf.

Timothy E. Zimmer, Ph.D.
Manager, Research and Analysis Division of the Indiana Department of Workforce Development

Charles Baer
Economic Market Analysis Team Lead, Research and Analysis Division of the Indiana Department of Workforce Development

Terry Brown
Labor Market Analyst, Research and Analysis Division of the Indiana Department of Workforce Development