Historically low labor force participation rate should be viewed with broader insight, VCU economist says

By Leila Ugincius

The U.S. workforce landscape is changing. And taking a step back from a recent government report reveals part of the story.

The Bureau of Labor Statistics reported little or no change in the nation’s unemployment or labor force participation rates in July, compared with the previous month. But the participation rate, which measures the number of people who are employed or job-seeking, registered at 61.4% – its lowest reading since June 1976 aside from during the COVID pandemic.

In fact, the participation rate has been in a steady decline for decades, excluding the major disruption during the early years of the pandemic. The decline means that more people are leaving the workforce while fewer unemployed people are looking for jobs. 

VCU News caught up with Christopher M. Herrington, Ph.D., associate professor of economics in Virginia Commonwealth University’s School of Business, for insight into the workforce landscape and its broad impact.

Why are people leaving the workforce? Is this by choice?

When a million people leave the labor force in a year, there are going to be myriad reasons, of course. But the data do give us some hints as to some of the more important driving forces.

For example, when we look at labor force participation by age groups, I think it is notable that the so-called “prime age” group (25 to 54 years old) has maintained strong and steadily growing labor force attachment post-COVID, and it remains near all-time highs.

Now, there was a notable decline for this group in June, but that was immediately followed by a small rebound in July. The data tends to fluctuate month-to-month, so I would not read too much into that at this point. I would need to see additional evidence over several more months before I would interpret it as anything more than just noise in the survey.

On the other hand, the 55-plus age group has seen steadily declining labor force participation for almost the last five years, and it now stands at the lowest point in more than two decades.

To me, this suggests that probably a lot of the labor force exits we are seeing now are actually retirements. This is really not terribly surprising, given that stock market performance has been very strong for several years, and the generation approaching retirement is likely feeling relatively wealthy and financially comfortable transitioning out of the labor force.

What effect, if any, is AI having on this workforce reduction?

This is an important question but also a challenging one to answer definitively. Economists are working hard to understand the impact of AI on labor markets, and I think the best we can say at this point is that the evidence is mixed.

One really nice summary of this work, which was just published in July by the Stanford Institute for Economic Policy Research, concluded that AI’s impact on overall employment is probably very small right now. But they also acknowledged that in some jobs that are most exposed to the impacts of AI (like software developers and customer service representatives), entry-level and younger workers are probably facing tougher job markets and more challenging career progression now compared with just a few years ago.

How are they making ends meet?

If we simplify the household budget constraint to the most basic components, it largely boils down to three things: income, spending and saving.

Real wage and income growth has been relatively steady, on average, but it’s also true that stubbornly high inflation has been eating into household budgets more and more. For the most part, however, this hasn’t really dampened the spending side as much as I might have expected. We have seen personal savings rates gradually declining over the last few years, and that is now near all-time lows.

When you combine this with other evidence about growing debt burdens for housing, automobiles, student loans, etc., it does raise the concern that American households may be reaching the limit to which we can stretch our budgets.

How is this affecting the U.S. economy?

At the moment, we’re not seeing negative effects on the overall economy from the consumer side, and if anything, consumer spending continues to be the largest contributor to ongoing aggregate growth. But in order for that to continue, we do need to maintain job growth, productivity growth and price stability. Ongoing uncertainty from geopolitical tensions, oil price fluctuations, and tariff policy changes are creating real challenges for both businesses and consumers, so I think stability along these dimensions would go a long way toward improving the overall macroeconomic outlook.

What does this mean for job hunters?

Like many people, I am seeing the news stories and hearing anecdotal reports from a lot of people who are frustrated about the job market and the pace of hiring right now, and that is certainly understandable. We are also seeing this in the data, as the average unemployment duration has been creeping up, and the long-term share of unemployment has also been rising. For someone who is unemployed and searching for work, there is little comfort from hearing policymakers talk about the low unemployment rate.

For those people, and especially anyone who is worried about the impact of AI, I would offer the same advice I am giving my students, which is to make sure your skills and knowledge are a complement to AI, not a substitute. As with other technological advances, the people who benefit from it are those who can leverage the technology to become more productive workers. Continue investing in yourself, and develop a portfolio of skills that prove you are an adaptable, continuous learner who will grow with the technology, not succumb to it.