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Economic Brief

August 2013, EB13-08

Will a Surge in Labor Force Participation
Impede Unemployment Rate Improvement?
By Andreas Hornstein and Karl Rhodes

The labor force participation rate has been falling since 2000, a trend that
accelerated somewhat during the 2007–09 recession. Some economists and
journalists have questioned whether recent improvements in the labor market
will cause non-participants to re-enter the labor force at a faster rate, thus
offsetting job growth and impeding further declines in the unemployment
rate. But recent worker-flow research suggests that this scenario is unlikely.
Following the recession of 2007–09, the unemployment rate peaked at 10 percent and remained above 8 percent for three years. During
this time, economists and journalists pointed
out that the persistently high unemployment
rate would have been even higher if the labor
force participation (LFP) rate had not been decreasing substantially. (Workers who leave the
labor force are not included in unemployment
rate calculations.)

also seems to provide an intuitive interpretation
of the observed negative correlation between the
LFP rate and the unemployment rate. Based on
this interpretation, some economists and journalists have raised concerns recently over what will
happen when this mechanism runs in reverse.
In other words, as the job market improves, will
non-participants return to the labor force at a
faster rate, thus offsetting job growth and impeding further declines in the unemployment rate?2

Anecdotal evidence seemed to confirm that the
high unemployment rate was making unemployed workers more likely to leave the labor
force while making non-participants less likely
to join the labor force. Journalists, for example,
interviewed discouraged workers—people who
had quit the labor force because finding a suitable job seemed increasingly unlikely to them.
News coverage also highlighted college graduates going directly to graduate schools and
parents staying home to raise children.1

Recent research confirms a negative short-term
correlation between the LFP rate and the unemployment rate, but it contradicts the interpretation that this negative correlation is caused by
transition rates between non-participation and
unemployment.

This perceived cyclical pattern of transition rates
between unemployment and non-participation

EB13-08 - Federal Reserve Bank of Richmond

Worker-Flow Analysis
The LFP rate is the percentage of the noninstitutionalized civilian population—age 16
and over— that is employed or actively seeking
employment. From the late 1940s to the mid1960s, the LFP rate was relatively flat, ranging
narrowly between 58 percent and 60 percent.

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(See Figure 1.) Beginning in 1964, however, the rate
began to increase steadily as baby boomers and large
numbers of women entered the labor force. The LFP
rate leveled off at about 67 percent in the late 1990s
when the percentage of women in the labor force
stopped growing and the oldest of the baby boomers
started taking early retirement. Since 2000, the rate
has declined steadily as more baby boomers retire
and as more workers age 16 through 54 exit the labor
force.3 This trend accelerated somewhat during the
recession of 2007–09.
Since the unemployment rate is the percentage of
labor force participants who do not hold jobs, studying worker flows between the two labor force categories—employment and unemployment—is a good
starting point for analyzing the unemployment rate.4
But economists increasingly have recognized the
importance of studying worker flows not only within
the labor force, but also in and out of the labor force.5

For example, if a company lays off a worker who begins looking for a job elsewhere, he transitions from
employment to unemployment, but if he retires, he
moves from employment to non-participation. Collectively, these worker flows determine the unemployment rate.
Unlike the LFP rate, the unemployment rate is characterized more by short-term business cycles than longterm demographic trends. There does not appear to
be any long-run relationship between the unemployment rate and the LFP rate in the post-World War II
era. As the LFP rate was increasing from the mid-1960s
to the late 1990s, average unemployment was first
increasing and then decreasing.
To filter out long-term trends and focus on shortrun correlations, one of the authors of this Economic
Brief (Hornstein) compares deviations from long-run
trends for both the unemployment rate and the LFP

Figure 1: Unemployment Rate Compared with Labor Force Participation Rate
Unemployment Rate
12

— Rate

— Trend

Percent

10
8
6
4
2

1948 Q1

1954 Q3

1961 Q1

1967 Q3

1974 Q1

1980 Q3

1987 Q1

1993 Q3

2000 Q1

2006 Q3

2013 Q1

1974 Q1

1980 Q3

1987 Q1

1993 Q3

2000 Q1

2006 Q3

2013 Q1

Labor Force Participation Rate
70

Percent

— Rate

— Trend

65
60
55
50
1948 Q1

1954 Q3

1961 Q1

1967 Q3

Note: The labor force participation rate is the percentage of the non-institutionalized civilian population age 16 and over that is
employed or actively seeking employment. The unemployment rate is the percentage of labor force participants (employed or actively
seeking employment) who do not hold jobs. All percentages are quarterly averages.
Source: U.S. Bureau of Labor Statistics, Haver Analytics

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rate.6 In this detrended data, he finds a negative correlation that supports the view that recent job growth
could bring large numbers of non-participants back
into the labor force. A common interpretation of this
cyclical pattern is that non-participants are more
likely to enter the labor force and unemployed participants are less likely to exit the labor force when
the labor market improves.
Hornstein’s worker-flow observations, however, do
not support this interpretation. Data from 1990 to
early 2013 show that when the labor market improved, non-participants became less likely to rejoin
the labor force and unemployed participants became more likely to leave the labor force. This result
seems counterintuitive, but it is consistent with recent
research by Michael Elsby of the University of Edinburgh, Bart Hobijn of the San Francisco Fed, and
Aysegul Sahin of the New York Fed. In a 2013 working paper that quantifies the relative contributions
of transition-rate volatilities to unemployment rate
volatility, they point out that observed worker flows
between non-participation and unemployment
contradict the view that non-participants returning
to the labor force will impede improvement in the
unemployment rate.7
If worker flows between unemployment and nonparticipation were the only factors, then Hornstein’s
observations would suggest a positive correlation between the unemployment rate and the LFP rate. But
Hornstein explains how his worker-flow observations
can coexist with a negative short-term correlation
between the unemployment rate and the LFP rate.
He finds two countervailing forces that more than
offset the effects of worker flows between unemployment and non-participation. First, unemployed
participants (in any scenario) are much more likely to
leave the labor force than employed participants. Any
decline in the unemployment rate will reduce the
number of unemployed participants, thereby reducing the overall exit rate from the labor force and
allowing for a higher LFP rate. The second countervailing force involves worker transitions from non-participation to employment without passing through
an intervening unemployment spell. Job growth
increases the likelihood of these transitions, further

strengthening the negative correlation between the
unemployment rate and the LFP rate.
Conclusion
Hornstein’s research confirms that the LFP rate and
the unemployment rate are negatively correlated
in the short run, with movements of the LFP rate
lagging about six months behind movements of the
unemployment rate. But worker flows between nonparticipation and unemployment are not the underlying reasons for this negative correlation. In fact,
all else equal, Hornstein’s observations of transition
rates between non-participation and unemployment
would indicate a positive correlation between the
unemployment rate and the LFP rate. The negative
correlation then stems from the fact that unemployed
participants are far more likely to leave the labor force
than employed participants and that transition rates
between non-participation and employment, without an intervening unemployment spell, are strongly
pro-cyclical.
The six-month lag in the negative correlation suggests that a lower unemployment rate induces a
higher LFP rate. It does not indicate, however, that
the currently low LFP rate will induce a higher unemployment rate in the future.
Andreas Hornstein is a senior advisor and Karl
Rhodes is a senior managing editor in the
Research Department at the Federal Reserve
Bank of Richmond.
Endnotes
1

Examples include Schoen, John W., “Discouraged Workers
Face Tough Road Back to Employment,” NBCNews.com,
October 4, 2012; Miller, Rich, “Discouraged Workers Stop Fed
from Taking Comfort in Jobless Fall,” Bloomberg.com, April 11,
2011; and Ruiz, Rebecca R., “Recession Spurs Interest in
Graduate, Law Schools,” New York Times, January 10, 2010.

2

For example, see Daly, Mary, Early Elias, Bart Hobijn, and Òscar
Jordà, “Will the Jobless Rate Drop Take a Break?” Federal
Reserve Bank of San Francisco Economic Letter,
December 2012.

3

For a graphic analysis of long-term trends in LFP, see Toossi,
Mitra, “Projections of the Labor Force to 2050: A Visual Essay,”
Bureau of Labor Statistics Monthly Labor Review, October
2012, pp. 3–16.

4

Early worker-flow analysis focused mostly on transitions
between employment and unemployment. For example,

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see Shimer, Robert, “Reassessing the Ins and Outs of Unemployment,” Review of Economic Dynamics, April 2012, vol. 15,
no. 2, pp. 127–148; Fujita, Shigeru, and Garey Ramey, “The
Cyclicality of Separation and Job Finding Rates,” International
Economic Review, May 2009, vol. 50, no. 2, pp. 415–430; and
Elsby, Michael W.L., Ryan Michaels, and Gary Solon, “The Ins
and Outs of Cyclical Unemployment,” American Economic
Journal: Macroeconomics, January 2009, vol. 1, no. 1,
pp. 84–110.
5

See Kudlyak, Marianna, and Felipe Schwartzman, “Accounting
for Unemployment in the Great Recession: Nonparticipation
Matters,” Federal Reserve Bank of Richmond Working Paper
No. 12-04, June 2012.

6

See Hornstein, Andreas, “The Cyclicality of the Labor Force
Participation Rate,” Manuscript, Federal Reserve Bank of
Richmond, May 2013.

7

Elsby, Michael W.L., Bart Hobijn, and Aysegul Sahin, “On the
Importance of the Participation Margin for Labor Market
Fluctuations,” Federal Reserve Bank of San Francisco Working
Paper 2013-05, February 2013.

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Views expressed in this article are those of the authors
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