Shrinkouts versus Dropouts: Explaining Declines in Labor Force Participation

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Labor force participation among prime age men (ages 25-54) has declined steadily in the US since 1950. I decompose the decline into two sources: 1) an increase in dropouts, or those who leave the labor force permanently, and 2) an increase in shrinkouts, or those who spend some of the time in the labor force and some of the time out of the labor force. Each component explains about half of the decline in labor force participation among prime age men. I find that the increase in dropouts is concentrated at the bottom of the skill distribution, while the increase in shrinkouts is more evenly distributed. An exercise to examine the effects of changes in labor demand suggests that diminished market opportunities explain only about 20-30% of the decline in participation and the rest could be due to changes in labor supply holding market opportunities constant.

Last updated on 06/16/2016