Thursday, November 28, 2013

The role of marginal non-participants in the labor force

While the unemployment situation in the US is gradually getting better, the numbers on the labor force participation continue to decline. This worries a lot of people because this can be a sign that some of the unemployed are getting discouraged and drop out entirely out of the labor force. But it may also simply be the continuation of a trend for a few decades already of a steady decline in the labor participation rate, in which case this would be much less worrisome.

Regis Barnichon and Andrew Figura add to this discussion that we should not only think about three categories (employed, unemployed, and not in the labor force), but four by adding the marginally not in the labor force. They are not in, but are close to getting in the labor force, an typical case being a discouraged formerly unemployed. These people tend to join by being unemployed first, while other nonparticipants join the the labor force by transitioning straight to employment, because they value not being in the labor force (students, retirees, mothers) and can only be attracted with a job. Barnichon and Figura document that the numbers of marginals has declined for quite some time, which can explain of decline of a half percentage point in the unemployment rate from 1976 to 2010. This cuts across all demographic groups, so a demographic shift can be ruled out as an explanation. The last recession may have unraveled all that, though, we will need a few more years of data and a full recovery to determine whether the trend continues.

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