Chart 1 depicts the overall participation rate along with the unemployment rate back to 1948. We typically don't look back that far, but demographic trends take a long time to develop and looking at short time periods is less meaningful. Notice that the unemployment rate has seen a downward trend since it peaked in 1982. Even recessionary periods didn't lead to the high unemployment rates of the 1973-75 and 1981-82 recessions. The labor force participation rate was rising through the 1990s and peaked in 2000.

Chart 2

Chart 2 compares the total labor force participation rate to the employment-to-population ratio. Both peaked in 2000 and neither has recovered from 2001 recession though the employment-to-population ratio has been improving over the past year.

Chart 3

Chart 3 compares the labor force participation rate of men over 20 to the employment-to-population ratio for this same segment of the population. Notice the long-term downward trend in these two series. The Aaronson et al study gives a more detailed breakdown of the male and female participation rates by age as well as measures the participation rates of various cohorts, but this downward trend tells the same story. Men's participation in the labor force has declined over the past 60 years. A variety of factors have played a role. For instance, men have been able to retire sooner, and they have also benefited from societal changes that have led to women's role in the labor force.

Chart 4

Chart 4 compares the labor force participation rate and the employment-to-population rates of women over 20. This shows the opposite trend of men with labor force participation and employment-to-population rates rising over time. But even among adult women, rates are no longer rising - after having peaked in 2000. The labor force participation rate of women is no longer on the upswing however. We have experienced the bulk of the change that has led childbearing women to the workforce.

Chart 5

Chart 5 compares the labor force participation rate and the employment-to-population rates of teens (aged 16 to 19). Aaronson et al suggest that teens aren't as interested in working because their parents are wealthier than previous generations. Also, they pointed out that some substitution has taken place between low-skilled women workers and teens. That is, low-skilled women are taking the jobs that teens formerly had and thus, their participation and employment history is reduced. Furthermore, the study suggests that lower real tuition costs have increased demand for college. Given the rapid increases in education costs in the CPI, I'm a little skeptical about that one. Although it is true that student loans are more readily available than they used to be and could be playing a role in labor force participation in this age group.

Incidentally, the Aaronson et al study focused on the sharp drop in the teen participation rate as a major factor behind the drop in the total labor force participation rate. If behavior should change in this segment of the labor force, it could point to greater labor supply than they are anticipating based on their model.

Chart 6

Chart 6 compares the labor force participation rates of men and women between 55 and 64 years old. Since the great bull stock market of the 1990s, many workers decided to retire early. At least, that's what the media has reported. In fact, the labor force participation rate among men aged 55 to 64 moderated from the late 1940s to the mid-1980s, but then seemed to flatten out. In fact, the labor force participation rate for men in this group has actually been on the rise over the past ten years from 66 percent in 1995 to 69.3 percent in 2005. The labor force participation rate for women in this age group has steadily continued to rise over the past 60 years. Indeed, a new peak was reached in February 2006 at 58 percent. Conceivably, women's participation in the labor force in this age segment could continue to rise.

The Aaronson et al study did state that their model fit for labor force participation at the older end of the scale could be under estimating growth in this segment - and this would potentially add to the labor supply.

Chart 7

Finally, Chart 7 compares the labor force participation rates of men and women over the age of 65. Again, if one were to believe all the news stories about early retirement, we should be seeing declines in participation. Granted, early retirement stories are less frequent these days and one hears more reports that older workers are returning to the labor force for a variety of reasons. At 19.8 percent in 2005, the labor force participation rate among men in this age group was at its highest rate since 1979. Among women, the 11.5 percent participation rate reached a new peak in the history of this series. Whether men and women are more physically able to work and therefore are finding work more enjoyable, or didn't plan well for retirement, or simply need to supplement health care costs, this group is seeing an upward swing in labor force participation.

Aaronson et al did suggest that changes in the health of elder workers was a factor in increased participation rates and could potentially add to the labor supply going forward.

THE BOTTOM LINE
Structural changes in the demographic structure of the labor force have played a major role in the recent declines in the labor force participation rate. Cyclical factors have also caused the labor force to surge and then drop, and it is true that the recovery from the 2001 recession didn't bring all the workers back to the labor force.

If cyclical factors alone were responsible for the changes in labor force behavior, then the potential labor supply would probably be higher than it is today and the low jobless rate would not cause significant demand and inflation pressures. However, given that structural factors are playing a major role in labor market changes, the current low unemployment rate (at 4.8 percent in February) could indeed be signaling a tight labor market. And Fed officials are appropriately concerned about it.

Incidentally, the Congressional Budget Office has assumed since the mid-1990s that the "full employment" unemployment rate is 5.2 percent. That means we have been at more than full employment for over a year and the chances for inflationary pressures are increasing as long as the jobless rate remains below 5.2 percent. One can argue whether or not 5.2 percent is the appropriate full employment rate, but there is no question that hourly earnings have accelerated over the past year. Wage acceleration is common in a period of full employment.