Explaining the Decline in the U.S. Employment-to-Population Ratio over Recent Decades
Understanding the various potential factors driving the structural decline remains a priority for labor economists and policy makers alike.
by Melissa Kearney | September 11, 2018
For several decades now, the employment rate among prime-age U.S adults has been falling. Less-educated males have experienced the largest drop in employment, but the troubling trends in participation are not limited to this group. Employment rates among women, which had been rising since the late 1960s, have stagnated and in some recent years declined. These worrisome developments were exacerbated by the Great Recession, but their roots preceded its onset.
Understanding the various potential factors driving the structural decline in employment-to-population ratios remains a priority for labor economists and policy makers alike. In recent work that examines the decline in the employment-to-population ratio between 1999 and 2016, my co-author, Katharine Abraham, and I ask two questions: First, what is the evidence on the causal relationship between a particular factor or set of factors and employment rates? Second, can changes in these underlying factors explain the trend in employment? Our evidence-driven review should be useful for guiding future discussions about the sources of decline in the aggregate employment-to-population ratio (beyond the business cycle) and the likely efficacy of alternative policy approaches to increasing employment rates.
Population aging has had a notable effect on the overall employment rate over this period, but within-age-group declines in employment among young and prime age adults have been at least as important.
Labor demand factors, in particular increased import competition and the penetration of robots into the labor market, are the most important drivers of observed within-group declines in employment, at least among the factors whose effects we are able to quantify.
Labor supply factors, most notably increased participation in disability insurance programs, have played a less important but not inconsequential role.
Implications for Policy
Labor demand factors have been important drivers of the secular decline in employment over the 1999 to 2016 period. In this category, increased import competition from China seems to have been the single largest contributing factor to the decline in employment. Increased trade with China was potentially welfare enhancing for many American consumers, but it does seem to have disproportionately harmed some segments of workers. It is therefore important to consider what policy responses might productively foster (re)employment and thereby mitigate the potential negative employment effects of import competition.
Labor supply factors as a group have been less important in driving the decline in employment, though still consequential. Our rough estimate is that the growth in SSDI caseloads over the 1999 to 2016 period led the employment-to-population ratio to be 0.14 percentage points lower than it otherwise would have been. The Veteran Affairs Disability Compensation program also has contributed to a reduction in employment rates, very roughly on the order of an additional 0.06 percentage point reduction in the employment-to-population ratio. We do not attribute any meaningful amount of the decline to expansions in public health insurance or food assistance programs.
Increases in the real value of the minimum wage at the subnational level may have had a non-negligible impact on employment rates among prime-age adults, accounting for perhaps an additional 0.10 percentage point decline in the employment-to-population ratio over this period.
We estimate that the rise in incarceration and the resulting growth in the number of individuals with prison records has contributed to a decline in the EPOP on the order of 0.13 percentage points.
The difficulties that working parents face in reconciling their parental and work responsibilities are also undoubtedly a factor in individual labor supply decisions, but it is unclear whether accessing affordable, reliable child care has become more difficult over this time. This is an open question, most relevant to the issue of declining female employment.
We do not attribute any of the reduction in aggregate employment to increases in the number of immigrants. The available evidence suggests that immigration may have had a modest effect on teen employment, but there is no consistent indication that it has affected either the overall employment rate or the employment of subgroups within the prime-age adult population.
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