Flow origins of labor force participation fluctuations

The onset and aftermath of the Great Recession have been accompanied by an historic cyclical decline in the labor force participation rate, which subsequently has remained persistently low. We provide a new perspective on these recent movements in labor force participation using a generalization of the market stocks in Elsby, Hobijn and Sahin (2013) and Elsby, Hobijn and Şahin (2015). The results paint a picture of contrasts between the proximate how origins of cyclical and secular variation in the participation. At cyclical frequencies, the results challenge a natural hypothesis that the pro-cyclicality of the participation rate has its origins in discouraged workers leaving the labor force during recessions, and (re)entering the labor force as labor market conditions improve. Labor force exits are in fact strongly procyclical, systematically working against declines in the participation rate in recessions, while labor force entry is comparatively acyclical. Our flow decomposition instead suggests that the majority of the procyclicality of the labor force participation rate is accounted for by churn within the labor force that is, flows between unemployment and employment.

At secular frequencies, however, the processes of labor force entry and exit loom much larger. Among men, two-thirds of the substantial trend decline in male labor force participation can be traced to rising rates of labor force exit, with the remaining third accounted for by trend declines in labor force entry. Among women, while declines in rates of labor force exit dominate the trend rise in female participation during the 1990s, the trend decline since the Great Recession has instead been dominated by declines in female labor force entry.