July 7 2014

Policy Focus: Missing Workers and Missing Growth

Rachel DiCarlo Currie

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One of the most striking aspects of the Great Recession and its aftermath has been the sharp decline in America’s labor-force-participation rate (LFPR). In December 2007, when the recession began, the participation rate was 66 percent. By June 2009, when the recession ended, it stood at 65.7 percent. As of May, it had dropped to 62.8 percent.

Economists are still debating how much of the decline reflects long-term structural trends (e.g., the retirement of the baby boomers) and how much of it reflects short-term cyclical trends (e.g., the withdrawal of discouraged workers in their prime earning years). The distinction between the two categories is often blurry: Goldman Sachs researchers argue that some of the key “structural” factors reducing participation—such as more people retiring, more people claiming Social Security disability insurance, and more people attending school—“have an important cyclical component,” which means they could change speed and/or direction if the economy got better.

It is also crucial to note that the LFPR among men aged 25 to 54 has fallen substantially—not just since the recession, but over the past several decades. This implies that faster economic growth alone won’t solve the problem. Policymakers need to think bigger. They need to consider reforms such as boosting support for apprenticeship programs, expanding the Earned Income Tax Credit and the child-care tax credit, reducing or eliminating implicit federal tax penalties that discourage work, exempting older workers from the Social Security payroll tax, and easing the burden of occupational-licensing requirements.

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