A publication of the Indiana Business Research Center at IU's Kelley School of Business
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What's Behind the Labor Force Participation Rate?

In recent years, increasing significance has been placed upon the percentage of our labor force that is unemployed, while the rate of participation in that labor force has generally gone unmentioned. This figure that indicates the percentage of people 16 to 65 years of age that are employed or actively seeking work is, however, a key component to our long-term economic growth. This study focuses on this important labor force participation rate and evaluates several factors that may play a part in one’s active participation in the work force.

The study examines nine years of data collected from 2002 to 2010. The data include statistics for the 50 states and the District of Columbia, which were assembled into a panel set containing 4,849 observations. View detailed methodology »

Results

Rational behavior and self-interest should indicate a positive relationship between economic growth and labor force participation. As the economy grows, more people should participate in the economy in an effort to reap the benefits of a stronger economy. However, the relationship between economic output and the labor force participation rate is not statistically significant. Rather, what is shown is that better economic conditions will only induce further participation when the benefits of a stronger economy are exhibited in higher wages. Increased per capita income is shown to be statistically significant with higher levels of labor force participation.

During the 2007-2009 recession, income levels and labor participation rates fell nationally. Since the trough of the recession, the economy has since grown at a slow pace. However, labor force participation growth has been more muted than the overall economy. Stagnant wages are one of the reasons for low participation. While the economy has grown at a slow pace, this has not translated to growth in wages. Wage growth has been stagnant. Labor force participation is shown to follow wages more than economic growth and, therefore, has been slow to recover as well.

A state’s cost of living is shown to have no statistically significant influence on the labor force participation rate. The need to work less in low-cost areas is not shown. It is possible that disparities in wages across the nation reflect the impact of differing costs of living more than participation rates.

Homeownership is negative and statistically significant. A higher homeownership rate is associated with a lower labor force participation rate. The probable mechanism for this relationship is likely reduced employee mobility.

An addition to the population may naturally increase the workforce, but it does not necessarily influence the labor force participation rate. There is no statistically significant influence due to population growth.

Educational attainment is statistically significant and positive. A more educated society has a higher labor participation rate. The time and monetary investment for education provide ample incentive for the population to remain employed. Additionally, those with higher levels of education are less likely to become unemployed or discouraged and drop from the workforce.

As expected, a higher percentage of the population over 65 years of age is a negative influence, thus yielding a lower labor force participation rate.

The state binaries are generally negative and indicate a statewide influence regarding the labor force participation rate. Without further data, teasing out state-specific causes is problematic. The purpose of the binary is to recognize these potential influences and control for them.

Summary

This study examined various influences on the labor force participation rate over a nine-year period. While taking yearly differences and statewide factors into consideration, a higher personal income and educational attainment level does serve to increase the rate of labor force participation. On the other hand, the cost of living, a state’s overall population or economic growth do not seem to significantly change the rate at which those between the ages of 16 and 65 either work or actively seek employment. As expected, the labor force participation rate does go down as the ratio of senior citizens (age 65 and older) increases. To a lesser degree, homeownership also decreases the rate of labor participation, perhaps due to the affect it has on worker mobility.

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

Debra A. Guzman
Economic Analyst, Indiana Department of Workforce Development