BPEA | 1977 No. 2

Intermediate Swings in Labor-Force Participation

1977, No. 2

MACROECONOMETRIC analysis of labor-force participation rates has concentrated on quarterly variations of these rates and their relationship with the short-run business cycle. Cyclical changes in unemployment rates are assumed to cause changes in participation rates as workers become discouraged in their search and drop out of the labor force; while longer-run effects tend to be subsumed in a general trend variable or variables.

I shall argue that the omission from the analysis of variables that reflect intermediate swings in labor-force participation rates arising from demographic factors lends an unwarranted significance to short-run cyclical factors and the time trend. These demographic variables provide the key to the main puzzle in the behavior of participation rates over the postwar period—that is, the tendency for participation rates of younger and older women to grow rapidly at different points in time. For example, in a seminal demographic study in 1968, Richard A. Easterlin wrote that “the most challenging recent observation calling for explanation is the remarkable rise in the rates of older women” (emphasis added). According to the more recent data, the story has been reversed. The participation rates of females 45 and over, after rising strongly between 1948 and 1963, have risen marginally since then. For young women, a flat trajectory of participation rates prior to 1960 has been replaced by a steeply rising trend since then. The payoff now is in explaining this latter development and the reversal of the age groups with dynamic growth in participation.