In Federal Reserve Chairman Jerome Powell’s semiannual monetary report to Congress last month, he said he was encouraged by the “solid” increase in the labor force participation rate over the past year.
This rate represents the percentage of Americans 16 and older who are working or looking for work. Individuals in institutions such as prisons or active-duty military are not counted in this measure.
He also mentioned that the labor participation rate for people in their prime working years (ages 25 to 54) continues to rise.
Powell’s emphasis on the prime-age labor participation rate is interesting because economists and policymakers have long tracked labor force participation rates for all adults as a major indicator of the labor market. Rising labor force participation points to a strong economy.
The U.S. participation rate was 63.2 percent in January — up from 62.7 percent 12 months prior.
This is encouraging because it implies that as jobs have become more plentiful, people who dropped out of the workforce because they thought they couldn’t find jobs are now starting to search for work.
However, the retirement wave of baby boomers has muddied that relationship. The large population of individuals leaving the workforce via retirement pushes downward on the participation rate regardless of the state of the economy.
Since the end of the last recession, the economy has experienced close to 10 years of expansion.
But the labor force participation rates have been generally in decline. The current rate is below the 67.3 percent peak that occurred in the nation from January through April 2000.
By age group, the 25-54 population has the highest participation rate. Above age 55, the participation rate begins to decline, especially from age 60 to 70. The participation rate also is lower before age 25, as many are still in school.
The value of the prime-age labor participation rate can be illustrated by comparing Virginia and Florida.
The participation rate in Virginia is a bit higher than the nation at 65.1 percent in December, the latest data available. It is up only slightly from a year ago, but has increased significantly from the 64.5 percent low point reached in November 2015.
Florida’s labor force participation rate is lower than Virginia’s not only because it has a larger percentage of seniors but also because its prime-age labor force participation rate lags Virginia’s.
On the other side of the spectrum, having a lot of college students also may lower a region’s labor force participation rate. If a metro area has a higher population mix in the 16-to-25 age group because of a concentration of large universities or colleges, that could lead it to having a lower participation rate, because full-time students are not in the labor force.
Due to those limitations, labor force participation for all adults may not be the best metric to use.
If some of the states have especially large amounts of older or younger adults, those states will likely have lower participation rates that don’t necessarily reflect economic health.
Limiting the metric to prime-age workers (age 25-54) as Powell did may be a better choice for such comparisons and for tracking economic performance.
Richmond’s labor force participation was 66.2 percent for those 16 years and older and 83.4 percent for prime-age workers, according to the American Community Survey. That compares to 65.5 percent for the 16 and above group and 83.2 percent for prime-age workers in Virginia and 63.3 percent and 81.6 percent, respectively, in the nation for the same period.
The data suggest that both Richmond and Virginia were performing better than the nation from 2013 through 2017.
(This commentary first ran in the March 11, 2019 edition of The Richmond Times-Dispatch.)
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