In the USA, people of age 16 and above are considered of working age. Of those of that age range, those who are working, seeking work, or hired but not yet working, are designated to be in the labor force. The labor force participation rate is the number of people in the labor force divided by the number of those of working age.
From 1950 to 2000, the labor force participation rate in the USA rose from 59 percent to 67 percent. Much of that increase came from the doubling of the participation rate of women, from 30 percent in 1950 to 60 percent in 2000. But total labor participation has declined since 2000 to 63 percent.
While the portion of women in the US labor force rose, the portion of men has been declining. The prime working years are considered to be from age 25 to 54, and one sixth of the men of that age range are not working. In 1950, only four percent of men of that range were not employed.
Many of those not working are not seeking work, and are therefore not counted in the labor force. They are also not counted as unemployed, because by definition, the unemployed are those actively seeking work plus those who have been hired but not yet started to work for wages. Two thirds of working age men are not seeking work, although some who sought work but stopped because they were discouraged, would take a job if offered.
About 40 percent of the men seeking work have been unemployed for six months or more. The chronically unemployed are less likely to become employed, so the long-term unemployment feeds on itself.
The real wage of lower-skilled workers has been falling since 1970. For workers who did not finish high school, the real wage (adjusted for inflation) has fallen 25 percent. That fall in wages is offset somewhat by the availability of new products such as cell phones and by the fall in the relative prices of electronics and other goods, but the cost of housing, medical care, taxes, and college tuition have risen to offset some of that productivity gain.
There are several reasons why male labor participation has fallen. First, more men are attending college. Second, due to the expansion of the war on drugs, the portion of men in prison has risen. Third, as more women work for wages, some male partners choose home production, doing house work and child care at home, which is real labor but not counted in the output data. Fourth, more people are obtaining government’s disability income. Very few on disability go back to work. Fifth, many in the first of the baby-boom generation, born during 1946-1950, are retiring.
The downward trend of labor participation will continue. The Congressional Budget Office estimates that the participation rate will fall to 61% by 2024. CBO calculates that the Affordable Care Act reduce the labor force by more than 2 million jobs. Workers will be able to quit their jobs without losing medical coverage, and the expansion of Medicaid will induce many more adults to obtain medical care without having a job.
One of the problems with a lower labor participation rate is that it reduces the ratio of workers to non-workers. Social Security and Medicare are supported by transferring income from workers to non-workers. A smaller labor participation rate will use up the trust funds and create a deficit for these programs sooner. Also, fewer workers results in lower economic growth, which implies that more of those in poverty will stay that way.
Much of the labor participation decline is not voluntary, but caused by tax and subsidy policies. Without taxes on wages and enterprise profits, both wages and employment would be higher. If the funds now going into Social Security instead went into tax-free private retirement accounts, those who retire would rely on their own past savings rather than transfers from those working. Without the income-tax distortion caused by tax-free medical insurance and taxed money wages, workers would be able to choose the insurance plan that fits them best rather than having to accept the limited plans offered by employers and the government.
The best alternative to taxing wages is to tax land rent or land value. But even without such a fundamental shift in policy, the labor force participation rate can be made more voluntary with employee and self-employment incentives for those long out of work, such as tax offsets and exemptions from restrictions (e.g. licensing, union rules, and city zoning) that prevents working at home, and exemptions from litigation risks. Immigration reform – legalizing those already in the country and allowing more of those with labor skills into the country, would also substantially increase the labor population.
The basic problem with labor world-wide are restrictions on hiring and firing labor, and the heavy costs imposed by taxes, regulations, and mandates on employers. If an employer, including a self-employer, could simply hire a worker without having to deal with forms and regulations, and with no taxes on the employer and the employee, we would have full employment at wages that would provide a decent standard of living. The labor problems we have are iatrogenic, a disease caused by the doctor, in this case, the economic malady caused by government policy. The government people look to for solving economic problems has caused them in the first place.