Digging Deeper Into Declining Labor Force Participation

Digging Deeper Into Declining Labor Force Participation

The labor force participation rate (LFPR) measures the percent of the population aged 16 and over willing to supply their labor. Since LFPR varies across demographic groups, changes in the demographic composition of the population will affect the overall LFPR. Moreover, changes in the willingness of a demographic group to supply its labor will also affect the overall LFPR. For more than a year, the LFPR has been declining on a year-over-year basis. Figure 1 shows that in May 2024, the year-over-year change in LFPR went negative for the first time since the COVID pandemic and has been negative nearly every month since then.

In this blog post, I decompose the recent decline in LFPR into changes in the composition of the population and in workers' willingness to supply labor. I find that reduction in foreign-born population share and reduction in their LFPR both contribute to the recent decline in the aggregate LFPR. This reduction is in addition to declines among other demographic groups' willingness to supply their labor.

Decomposing the LFPR
Changes in the aggregate LFPR is made up of changes in both the demographic composition of the population and the behavior of all the demographic groups in the United States that contribute to the labor force. This is made clear by expressing the LFPR as follows:

where LF_t = Labor force, POP_t = Population, and p_i,t = population share of group i. This formula simply writes the aggregate LFPR that is reported by the US Bureau of Labor Statistics (BLS) each month as the sum of the LFPR among different groups, denoted by i, weighted by the share of the population that group irepresents.

It follows, then, that changes in the LFPR from one period to the next can be decomposed into changes in the population share of each group [p_i,t − p_i,t−1] and changes in behavior [LFPR_i,t − LFPR_{i,t − 1}] of each group:

We can think about each group's change in LFPR as a change in behavior of that group-the group's willingness to supply their labor.

Defining groups
I decompose the year-over-year change in the monthly aggregate LFPR for five mutually exclusive population groups: (1) foreign-born in the United States less than five years, (2) foreign-born in the United States five years or more, (3) native-born 16-24 years old, (4) native-born 25-54 years old (often referred to as "prime-age"), and (5) native-born 55 years and older.

For point of reference, in August 2025, native-born 25-54-year-olds make up the largest share of the labor force (50 percent). Foreign-born who have been in the United States five years or more and native-born who are 55 years and older are nearly tied for second place (at 17 and 18 percent, respectively). I separate the foreign-born into two groups based on work done by my colleagues showing that there are distinct behavioral differences between immigrants who are new to the United States and immigrants who have been in the United States for five or more years.

Figure 2 shows the contribution that each group makes to the changes we've seen in the LFPR during the past year. The darker portion of each bar reflects the contribution of each group's change in population share since the previous year in that month, and the lighter-colored portions of the bars reflect the contribution of each group's change in participation behavior since the previous year in the same month. I plot the year-over-year change to remove the seasonal factors that could affect the LFPR. Notwithstanding the difficulties of survey data in capturing the foreign-born, especially the unauthorized foreign-born, the patterns that the decomposition reveals are informative about what's been going on with labor supply during the past year.

Interpreting the decomposition
First of all, any bar in figure 2 that is above zero is supporting positive growth in the aggregate LFPR, and any bar below zero is pulling that growth down. For example, since those 55 years and older include many people who have retired, we see that changes in their LFPR from one year to the next (light teal bars) are below zero, pulling down aggregate LFPR.

Secondly, note that-with the exception of new immigrants (the blue bars)-changes in participation during the past year among most groups has been working to pull the LFPR down, perhaps reflecting workers who are becoming increasingly discouraged by job prospects. Although the Conference Board's Employment Trend Index has been trending down steadily since 2022, recent shifts in two of its components are consistent with more recent discouragement among workers: a decline in temporary employment and a rise in workers reporting "jobs are hard to get."

Additionally, the shift in immigration enforcement policies since the beginning of 2025 may be contributing to what we see in figure 2. Although the Department of Homeland Security (DHS) has not updated statistics on enforcement and removal operations since December 2024, large and sweeping round-ups of immigrants have been reported by the media (for example, see recent reports here , here , and here ).

In addition to potentially negatively affecting foreign-born population shares, especially among those in the United States less than five years (see declining dark blue bars in figure 2), recent DHS operations could be creating a "chilling" effect on labor force participation, and their effects can be seen by the growing negative contribution of labor force participation among the foreign-born who have been in the United States for five years or more (see the light green bars in figure 2).

Implication for the labor market and beyond
Some industries employ a large number of unauthorized workers. Anywhere from 26 and 30 percent of workers in agriculture and construction (combined) are estimated to be unauthorized immigrants. In addition to the chilling effect recent immigration enforcement policies appear to be having on the labor supply of foreign-born workers, declining confidence among native-born workers about their labor market prospects appears to be having an even broader negative impact on the supply of labor.

Although slowing labor force growth has the potential for negatively affecting economic growth potential, there is a silver lining. As recent job growth has all but disappeared , declining growth in labor supply has resulted in what Federal Reserve chair Jerome Powell refers to as a "curious balance" in the labor market-a situation where the unemployment rate is not rising in spite of what might be considered alarmingly weak demand for labor.