TREND WATCH: What’s Happening? Over the entire postwar era, the U.S. labor force participation rate of prime-age men has continued to fall. Since the late 1990s, the LFP of prime-age women has joined the downward trend—indicating that, while today's economy may not yet be back to full employment, "full employment" is gradually falling over time.
Our Take: Falling LFP acts as a long-term deflationary drag on GDP, consumption, tax revenues, etc. It also reflects a fundamental (if gradual) shift away from the labor market and toward non-market activities. The flip side of a decline in formal work time: an increase in (noncash) DIY and social time.
On the surface, the U.S. labor market looks to be regaining its footing. Unemployment sits at just 5%, nearly all the way back to where it was before the Great Recession started. Although the rate of employment growth is declining, many experts—including some at the Fed—believe that this is because we are nearing (or even have reached) full employment.
But these statistics leave something important out of the picture: The employed share of the population remains considerably lower than it was pre-recession. From trough to now, the unempoyment rate may be back to nearly 100% of the previous peak, but the employment rate is only back to 29% of the previous peak.
Why? Well yes, one big reason is that the large Boom Generation is retiring--and pulling the overall employment rate down with them as they do. But another reason, just as big, has nothing to do with Boomers. It's that the employment rate of prime-age adults (age 25-54 ) has been falling. From trough to now, the employment rate of prime-age adults is only back to 58% of the previous peak.
When the employment rate stays down while the unemployment rate returns to normal, that's a sure sign that the labor force participation (LFP) rate is declining. In fact, the prime-age LFP (though ticking up a bit in recent months) has fallen two percentage points since 2007.
Longer term, we can see that the prime-age LFP decline has only been with us since the late 1990s. This is the result of two very different trends by gender. Among men, LFP has been on a downward glide for a very long time--at least since World War II. All told, it has declined by nearly 10 percentage points since 1948, with the rate of decline accelerating recently. Among women, it rose strongly over the most of the postwar era, more than making up for the male decline. Then, in the late 1990s, women joined men on the downward trend.
Not only is the employment rate for prime-age adults declining over time, but so too are hours worked. From 2006 to 2015, as the part-time share of prime-age adults has risen, average weekly hours per worker age 25-54 have declined from about 41 to 40. That's a 2% decline in average hours--compounded on a 3% decline in the employment rate itself.
Compared to other nations, the U.S. trend is noteworthy. White House economists note that the drop-off in U.S. prime-age male LFP drop-off since 1990 has been the steepest of any OECD nation except for Italy. Economic heavyweight Larry Summers predicts that more than one-third of U.S. men ages 25 to 54 will be out of the workforce by mid-century.
DRIVERS
What could be behind the LFP drop-off? Plenty of explanations have been offered—most of which fail to tell the entire story.
A stronger social safety net. Some argue that more generous social benefits and higher effective marginal tax rates have reduced the incentive to work, especially among low-income households. Frequently cited as evidence is the rising share of workers on disability insurance (DI). But those who “retire early” on DI skew old, limiting the effect on prime-age LFP.
Changing gender roles that keep more men at home. Some say that more men are assuming household duties. Maybe so, but that’s not causing the decline: American Time Use Survey data show that prime-age non-working males actually spend less time caring for household members than their working counterparts.
Increased educational attainment. Are would-be workers simply staying in school longer? Yes, many Millennials are working toward advanced degrees to increase their likelihood of finding a well-paying career. The Richmond Fed cites increasing educational attainment among women as a significant contributor to falling female LFP. But this factor plays only a minor role in declining male LFP, since the male drop-off has occurred primarily among non-college men.
The decline of blue-collar work. A better explanation points to the long-term slide of middle-skill sectors that traditionally have employed male non-college graduates. In 1954, U.S. manufacturing and construction supplied nearly 40% of all jobs. Today? Just 13%. Which professions have taken their place? Service and retail—which are marked by high turnover, low average hours per week, and little sense of workplace attachment. In 1980, two young men entered a blue-collar job for every one entering retail. By 2010, it was the reverse.
Closer parenting. Over the last 25 years, time-use diaries report substantial increases in the average hours per day that parents spend with their children. The trend began with Boomer parents in the 1990s and is continuing with Xer and Millennial parents today--at every socioeconomic level. Meanwhile, the biggest declines in female LFP since the late 1990s have occurred among married prime-age women. (The LFP of young single and older married women has shown little or no decline.) It is likely these trends are causally connected.
Declining "work centrality." Probably the most important (and least-discussed) driver has been cultural. Surveys confirm that today's prime-age adults identify less with formal employment as an essential social role than previous generations did.
In the ‘50s and ‘60s, prime-age G.I. Generation and Silent Generation men saw work not just as a way to earn a living—but also as an obligatory male activity. Men who did not work were held in low esteem (and, according to every psychology textbook at the time, held themselves in low esteem).
All that changed starting with young Boomers who rejected their parents’ gender roles and their notions of a conventional career. Young women flooded into the workplace even as young men continued to withdraw. Interestingly, as Boomers have aged, both genders have embraced work as an enriching, values-filled experience—resulting in record-high LFP rates among 60-somethings.
But workforce withdrawal has steepened with Generation Xers and Millennials—and there is no indication that, like Boomers, they will embrace the “work ethic” and stay on the job longer as they grow older.
WHY XERS ARE WORKING LESS
Xer trends: low work centrality. Xers see work as a means to an end, not an end in itself. They feel that success in life is measured by your ability to meet your needs, whatever they are, with least effort—not how much (or even whether) you choose to work to meet those needs. From an early age, Xers have shown low work centrality as measured by countless surveys. Many would rather spend fewer hours working conventional jobs, and spend more on non-marketplace do-it-yourself activities.
Xer opportunities: It’s all about DIY. Xers are driving demand away from “middleman” services and toward self-guided projects. Instead of buying a piece of preassembled furniture (effectively working more to afford the added cost of assembly), many Xers buy a ready-to-assemble piece from IKEA. For home repairs, Xers would rather go to Lowe’s (LOW) or Home Depot (HD) for materials than pay a contractor to do the job. In their personal lives, they use fitness trackers like the Fitbit (FIT) instead of spending on a personal trainer or a gym membership. Xer parents without a 9-to-5 use the free time to take care of the kids, perhaps with the help of educational toys from LeapFrog (LF)—limiting demand for child care professionals.
WHY MILLENNIALS ARE WORKING LESS
Millennial trends: delayed adulthood. The decline in LFP of Millennials is less driven by the DIY lifestyle. Rather, it is driven by this generation’s greater willingness to rely on non-market support from family and peer groups to sustain them. With a supportive community to depend on, many Millennials feel that they can afford not taking a job while they wait for a career to come along. (In fact, this phenomenon has spurred an entire school of literature on the concept of “emerging adulthood.”)
Many sociologists even link Millennials’ winding career paths to a fundamental theme: that today’s young men show declining career ambition just when women show rising ambition. In 1997, 18- to 34-year-old men were slightly more likely than women to say that being successful in a high-paying job was at least “very important.” By 2011, however, this gap had reversed. Professor Michael Kimmel notes that the once-transitional period between adolescence and adulthood has ballooned in length: “What used to be regressive weekends are now whole years in the lives of some guys.” Many Millennial men report having trouble squaring their expectations of adulthood with the reality of a post-recession economy.
Millennial opportunities: It’s all about community. Millennials harness the power of family, friends, and even strangers to help them with tasks. Instead of hiring movers, Millennials can simply ask their friends for help on Facebook (FB). They visit Craigslist in search of used furniture and appliances instead of patronizing big-box stores. Millennial parents can ask Mom or Dad to watch the kids instead of shelling out for a babysitter. Their social habits are even dampening demand for housing: Millennials are content living with parents or with peers in dorm-like co-living arrangements such as WeLive.
THE BOTTOM LINE
In a declining-LFP environment, more people are working in the (unmeasured) informal economy—and fewer in the (measured) cash economy. This may lead to less specialization, declining economies of scale, and a slower advance in living standards. It will certainly lead to lower growth rates in GDP and consumer spending, making the Fed’s already tough task of stimulating demand using monetary policy even tougher. All else being equal, if recent prime-age LFP trends persist, it would mean roughly a 2% decline in total employment by 2035.
But a decline in measured economic activity will be mirrored by an increase in the amount of time spent on non-market tasks. Xers will take an ever-greater non-market role in goods and services production—in effect, breathing new life into the old concept of cottage industry. Millennials, meanwhile, are providing for themselves by transacting more outside the market with trusted friends and family.
In both cases, the effect is a long-term deflationary withdrawal from the labor market as we know it.
