Labor Force Participation

Labor Force Participation


The labor force participation rate is defined as the proportion of a population that is either employed for pay or profit (for one hour or more in the reference week or fortnight) or looking for paid work over some period of time. By definition, people who are carrying out unpaid work in the home or voluntary work are not counted as employed.

The concepts of employment and unemployment are more easily defined for a developed capitalist economy that has a market for wage labor. In less developed countries (LDCs), where wage labor is not a predominant form of employment, the concept of unemployment becomes fuzzy: The line between employment in the informal sector (e.g., selling cigarettes on street corners) and unemployment is not clearly defined (see Turnham 1993). Similarly, the concept of looking for work becomes vague when social security benefits are not available and when labor markets are not developed. Often, when the unemployed are unable to find work for any length of time they give up looking for work and hence are not in the labor force (they are the so-called discouraged workers). In societies that provide welfare benefits to people with disabilities, people often move between the unemployed and disabled categories, and hence the participation rate as measured is unclear. Because the concept of unemployment is problematic in some countries, economists often compare employment-population ratios instead of participation rates.

Social customs, culture, and institutions (including the legal framework) play a large part in the participation of women and younger people in the labor market. In LDCs where there is no compulsory schooling, children are part of the labor force. In certain cultures where religion plays an important role, females do not engage in paid work and hence are not part of the labor force.

It is common to distinguish between the participation rate of males and females, and more detailed studies look at differences in the participation rates of several subgroups, such as married females and single females, whites and blacks, young and old, migrants and natives. In general, female labor force participation rates have been rising and male participation rates have been falling in most countries of the Organization for Economic Cooperation and Development (OECD), except for Japan, where male participation rates have risen. Male participation rates for older workers have been rising since the mid-1990s, possibly because of better employment conditions and better superannuation provisions for retirement after sixty-five years of age, or due to (in the United States) provision of health care for employed workers. Note, however, that the participation rate of both males and females has fallen in the United States since 2000, and whether this is a trend fall or a cyclical fall is a contentious issue (see Aaronson et al. 2006 and Juhn and Potter 2006). Participation rates tend to first rise with age and then fall as people get older. Participation rates of more educated people are usually higher than those of less educated people.

During World War II many women from the combatant countries worked in the war industries, and after the end of the war continued in the labor force. The increase in female participation rate is sometimes explained by the change in the structure of the economy from a dominant manufacturing sector to a dominant services sector that demands (allegedly) feminine skills such as computer keyboard skills. The increased level of education of females has also led to increased female participation, especially in white-collar jobs, often in parttime employment. The changing social mores that came with the womens liberation movement and the increased access to and ease of contraception via the Pill, which provided greater control over and timing of childbearing, lowered fertility rates and increased female participation rates. Increased real wages of women, as well as the introduction of equal pay legislation in many OECD countries, increased female participation rates. The development of household appliances (e.g., washing machines, microwave ovens, and so on) that lower time spent in household work for females have also had a positive impact on female participation rates (see Blau and Ferber 1992).

Male participation rates have declined with a fall in employment in the manufacturing sector, especially for older males who were made redundant and were unable to find work in the newer industries. However, in most OECD countries expanding economies (and perhaps the tightening of access to welfare benefits) appear to have increased participation rates for all males (including older males) since about 2000.

It is important to note that the labor force participation rate depends on both demand and supply factors: For example, a higher proportion of women are working if the demand for the skills that women offer is high. Generally, participation rates are procyclical: They rise during booms and fall in recessions. If for some reason employers discriminate against women in one country, their participation rate is lower than in a society where such discrimination does not exist. Similarly, womens participation rate is higher when they place a lower value on their time spent at home, and so are willing to supply more labor.

Economic analysis of labor force participation begins with neoclassical models of utility maximization subject to a budget constraint: Individuals are assumed to be maximizing their individual welfare (dependent on consumption and leisure or nonmarket time) subject to a given wage rate and some nonlabor income (either from social security or from family sources). (Usually the models are based on individual maximization, rather than family decision-making.) This typically provides an individual with a reservation wage that depends on the value of leisure (or nonmarket time). A reservation wage is defined as that wage below which the individual prefers not to work. Individuals have different reservation wages depending on their preferences for leisure, their access to nonlabor incomes, and their educational background. Female labor force participation is more difficult to analyze due to their roles as household managers, childbearers and caretakers, and paid market work. Even though social mores have changed over the past few decades, women continue to do the same amount of unpaid household work.

Models that allow for family decision-making (where the husband and wife choose whether to work or not, and decide who produces household goods, e.g., child care at home, meals at home, etc.) are more complex and difficult to estimate econometrically. Some models treat these as bargaining models in a game theoretic context. In general, the probability of a wife working is positively related to her husband working (Pencavel 1998). This may, of course, also be explained in terms of assortative mating,that is, highly educated and well paid males tend to marry highly educated and well paid females.

In a life-cycle context, males invest in education in their youth, then work and acquire pension or superannuation benefits, and retire in older age. Females invest in education (more so since World War II), work for some time, have children and leave the labor force, return to the labor force when the children are of school-leaving age, and then work until retirement. This stylized life-cycle behavior is easily explained by simple models of utility maximization. Participation rates of young people decreased with the increased participation in education in the postwar period. Retirement decisions were based on availability of pension or social security funds, accumulation of wealth over the life cycle, and health and family considerations.

There is an important interaction between the tax and welfare systems and participation rates, which makes the budget constraint nonlinear and sometimes nonconvex: Simple models of maximization of utility become complex and difficult to estimate. It is often argued that welfare benefits tend to lower participation rates, especially of women, as their nonlabor income is higher and hence their valuation of nonmarket time is higher. Child care support for families generally increases participation rates for married females.

To summarize, the research on labor force participation has expanded dramatically over the last decade, especially studies of the impact of tax and welfare policy changes. There is little hard evidence to support the popular view that welfare and social security provide disincentives to work. Most of the empirical evidence is based on simple static (one-period) individualistic models that do not allow for family decision-making. Work on household decision-making is still in its early stages, and further research is needed that allows for life-cycle decisions that include household saving jointly with labor-supply decisions and family formation and dissolution. Most empirical studies of labor-force participation find that noneconomic considerations play an important role in explaining behavior.

SEE ALSO Business Cycles, Real; Education, Unequal; Employment; Game Theory; Gender Gap; Inequality, Gender; Inequality, Racial; Labor; Labor Demand; Labor Market; Labor Supply; Utility Function; Wages; Work; Work and Women


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P. N. Junankar

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