The Recent Decline in the Labor Force Participation Rate and Its Implications for Potential Labor Supply

THE LABOR FORCE PARTICIPATION rate is defined as the percentage of the noninstitutional working-age population (those aged 16 and over) report-ing themselves as either working or actively looking for work. This statis-tic is constructed from data collected as part of the Current Population Survey and published monthly by the Bureau of Labor Statistics (BLS). Its longer-run trend is an important determinant of the supply of workers to the U.S. economy. For much of the past four decades, the participation rate has trended upward, rising from less than 60 percent in the early 1960s to more than 67 percent by the late 1990s. However, after peaking at 67.3 per-cent in the first quarter of 2000, the participation rate fell steadily to under 66 percent by early 2005 and has edged up only to just above 66 percent since then. As figure 1 shows, such a decline in labor force participation is nearly unprecedented in the postwar experience. Although the upward trend be-tween the mid-1960s and the mid-1990s was occasionally interrupted by relatively brief periods of little change, few episodes of persistent outright decline are evident in the data. Indeed, even after the upward trend from the earlier period is removed (using, for example, a Hodrick-Prescott filter