Why has the US fallen behind the UK in labor force participation?

Americans once seemed to hold an unstoppable labor market advantage over their cousins across the pond, but no longer. Prime-age women and health / disability differences appear to be key drivers.

Having gone their separate ways for more than 240 years now, it is no surprise that the United States and the United Kingdom as nations have grown ever more distinct.

But the US and the UK still share much in common: linguistically, culturally, and politically (and that was even before Meghan Markle’s engagement to Prince Harry).

And the two also bear some economic similarities. Both nations print their own currency, both of which serve as world reserve currencies. Monetary policy in both countries is controlled by respected and politically-independent central banks. Both have a substantial immigrant population share — 14.2% in the US and 13.1% in the UK according to 2015 UN data — which of course is a major factor fueling contemporary politics in both nations. And both countries have relatively high shares of the population with college degrees — 44% in the US and 42% in the UK according to 2014 OECD data.

But these very similarities only punctuate an economic mystery: why has the US fallen behind the UK in labor force participation?

A twenty year mystery.

The US enjoyed a large advantage in overall labor force participation — the share of the adult population holding or actively seeking a job — over the UK as late as the end of the 1990s. Over the four quarters ending in 1998 Q2, the participation rate was 4.7 percentage points higher in the US.

But then the US premium began falling: by 2013, it disappeared entirely, and today, participation in the UK is 0.7 percentage points higher than in the US overall.

What explains this 5.4 point swing, from a 4.7 percentage point advantage to a 0.7 percentage point disadvantage?

The UK avoided the 2001 recession.

Part of the growing US-UK wedge is explained by the 2001 recession, which struck the US but mostly avoided the UK. US participation fell by a percentage point in response to that recession through 2004. Afterwards, even as the US economy recovered, participation stayed flat rather than return to its pre-2001 peak. The UK has essentially undergone one fewer recession than the US has over the last 20 years, and the importance of that fact is critical.

But business cycle differences alone cannot explain all of the wedge, because the 2008 recession hit both the US and UK hard. Yet US participation fell by more than 3 percentage points thereafter and did not start growing again until 2015. By contrast, UK participation fell by less than 1, and then in 2012 began recovering. UK participation fully recovered to its pre-crisis peak by 2016.

Half of the shift since 1998 is explained by faster US aging.

A large portion of the wedge is due to the relative aging of both countries’ populations. Through 2015, the US enjoyed a demographic advantage over the UK when it came to participation, primarily because people in their prime working years (generally considered 25–54 years old) were a larger share of the US adult population for most of that time.

As the first chart shows, if the US population looked more like the UK’s in terms of the age and sex distribution of the population, then US participation would have been 2 ½ percentage points lower on average in the late 1990s.

But while both populations have aged over the past 25 years, the US has aged faster, so that now the 25–54 share of the population is lower in the US than in the UK. The US demographic advantage eroded and then flipped to a disadvantage. Today, a US population that mirrored UK demography would see a 0.2 percentage points higher participation rate.

All told, the reversal of the US aging premium explains half of the 5.4 percentage point swing since 1998 Q2.

Today, health / disability is a far bigger reason for nonparticipation in the US than in the UK. Retirement is far smaller.

Aging, however, does not explain the entire US-UK wedge. To shed light on the rest, we can use data from both countries to compare the reasons why people say they are not looking for work.

The UK and the US are not perfect controls for one another, but the two nations produce labor market data that is often conceptually compatible. The Current Population Survey (CPS) in the US and the Labour Force Survey (LFS) in the UK both classify labor force nonparticipants by almost exactly the same categories of reasons: retirement, school enrollment, health / disability, taking care of home / family, or other. Both surveys also ask all nonparticipants, regardless of their stated reason, if they want a job; we label them here as “discouraged” workers. Because of this compatibility, we get a broad sense of what driving the US-UK wedge by directly comparing each country’s rates of nonparticipation by these reasons.

Looking at the most recent data, US participation was 0.7 percentage points lower in 2017 Q3 than in the UK. Only around 0.2 percentage points of this can be explained by demographic differences. Once we control from these differences, there are three major factors driving the current wedge. The largest by far is health & disability: American adults had a near-3 percentage point higher rate of nonparticipation due to short- or long-term health issues than British adults. American adults are also more likely to be out of the labor force due to home / family care, by almost 2 percentage points, and school enrollment, by almost 1 percentage point.

Notably, though, there are still factors that favor US participation. US adults are 3 percentage points less likely to be nonparticipants due to retirement; this is reflected too in the US’s consistent and significant lead over the UK in the participation rate among adults 55 and older. The US also has a lower share of adults out of the workforce due to discouragement — not looking but wanting a job.

Health / disability also explains most of the nondemographic swing since 1998.

This helps explain the current wedge, but a different way to parse the data is to account for the entire 5.4 percentage point swing since early 1998.

We already know that shifts in the age & sex composition of the two countries’ adult populations explain half of this shift. Of the other half, health / disability is the single largest remaining factor, accounting for 2.1 percentage points of the swing (Note that these survey categories are self-reported by respondents; they do not necessarily indicate that respondents receive disability benefits in either country, such as SSDI or SSI in the US, though many do).

And although discouraged nonparticipation is still lower in level terms in the US, since 1998 this US advantage has tapered, which explains 1.2 percentage points of the swing since then.

As in our earlier snapshot of 2017 Q3, retirement nonparticipation is a positive factor for the US-UK wedge since 1998, otherwise raising the US participation advantage by 1.2 percentage points, though this has come down since its peak in 2012.

Women overwhelmingly drove the decline in the US participation advantage relative to the UK.

Breaking down the cumulative swing further by age and sex cohorts, a few more striking details emerge. The fall in US retirement nonparticipation relative to the UK, for example, has been entirely driven by men. Older men were the biggest contributors to the health / disability factor, but prime-age women were a bigger contributor than prime-age men. Moreover, differences in US and UK participation due to home / family care was just as large a driver among prime-age women as the health disability factor was, and discouraged prime-age women were an even bigger drag. Differences in female participation in fact accounted for 2.1 points of the nondemographic swing, versus 0.6 points from men.

US and UK nonparticipation has generally followed similar trajectories… except for health / disability.

Comparing levels of nonparticipation between the US and UK shows that for most of these factors that have been a drag on the US-UK wedge, the US and the UK have seen the same general trajectory of change since the 1990s, but the US advantage has shrunk or its disadvantages grown. For example, nonparticipation due to school enrollment has grown in both countries, but a bit faster in the US. By contrast, home / family nonparticipation has fallen in both countries since the 1990s, but the pace of decline has been shallower in the US.

The clear outlier here is health and disability, where the US and the UK have followed opposite trajectories. In the 1990s, UK nonparticipation due to health / disability was 4 percentage points while in the US it was 4 ½ — not dramatically higher. But since then the US rate has risen to 6 and the UK rate fallen to 3.

No silver bullet explanation, but some hypotheses.

Despite their similarities, the US and the UK have deep differences in both culture and policy that are far too complex to do justice to here. Nevertheless, some key factors are worth considering.

On disability, the UK has introduced changes to its disability system several times over the last 20 years, including in 1999, 2004, and 2013. Many of these changes were specifically designed to transition recipients into work where possible. Unlike US Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI), the UK’s core disability benefit — the Personal Independence Payment (PIP) — is universal and not means-tested, so on its own it does not discourage recipients to work. However, other UK disability programs such as Employment and Support Allowance (ESA) do have income limitations similar to their American counterparts.

Another possibility is the difference in the two countries’ health care systems. The UK’s universal health system has less inequality of access than the US system, and along several metrics the UK has better health outcomes than the US. It may therefore be more effective at managing work-debilitating ailments than the American system. And while opioid abuse is high in the UK relative to the rest of Europe, the UK has avoided the sheer magnitude of the US opioid crisis.

That prime-age women have driven most of the shift since 1998 raises the possibility that a key culprit may be differences in family policy, such as paid parental leave. Mothers in the UK are entitled to up to 39 weeks of paid leave after the birth of a child, with some additional time offered to fathers and in the form of unpaid leave. The United States meanwhile is alone among advanced economies in not having a national system for paid parental leave. Prior research on international differences in women’s labor force participation found that between a quarter and a third of the relative US weakness since the 1990s was due to the US falling behind in family-friendly policies.

A more recent focus in analysis of US labor force participation has been the employment effects of increased import competition from China, especially since its ascension to the World Trade Organization in 2001. The share of UK imports from China has also risen over this time, but at 7.2% is only half of the US import share from China. The UK does far more trade with the EU, though these relationship will change post-Brexit.

Conclusion

The US, once comfortably ahead of the UK in labor force participation, has lost all of its ground since the late 1990s. Much of this shift is just due to diverging patterns in US and UK demography. But health and disability is a large driver of the shrinking wedge, as well as discouragement and home / family care among prime-age women. Meanwhile, elderly participation continues to run much higher in the US, with rates of nonparticipation due to retirement far lower in the US.

There are a broad array of possible explanations for these divergences, including differences in health, disability, and family support systems as well as different macroeconomic dynamics. As policymakers in the US continue to look for ways to encourage participation to recover back to its pre-crisis levels, such differences between the US and other countries will prove instructive.