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An in-depth look at regional and national economic trends that matter to the Fifth District.

Regional Matters

May 15, 2019

Fifth District Trends in Labor Market Participation

By many metrics, the labor market is very tight. The national unemployment rate ended 2018 at a level not seen since the 1960s, while the unemployment rate for the Fifth District reached its lowest level since the first half of 2000. The number of job openings in the United Sates exceeds the number of workers looking for jobs, and the level of initial claims for unemployment insurance is near a 50-year low. Businesses indicate that finding and retraining workers is difficult. Yet the percentage of working-age adults in the country who are active in the labor market — the labor force participation rate — is below where it was prior to the Great Recession.

The labor force participation rate peaked in the late 1990s and had been in decline until the last few years. After peaking at 67.3 percent in early 2000, the labor force participation rate declined in two stages: gradually during the first half of the 2000s before leveling off just prior to the Great Recession and then more sharply during and after the Great Recession until reaching a 40-year low of 62.5 in 2015.

Underlying the overall decline are movements by various subgroups within the labor market. There are notable differences in trends by age group, gender, and educational achievement. With respect to age, while there was a fairly steady decline for prime-age workers from 2000 to 2015 (with the exception of 2005 to 2008), there was a much larger decline for younger workers — particularly workers aged 16-19. In contrast, the participation of older workers (55 and older) increased from 1990 to 2010 and has held steady since. The labor force participation rate for men has been in decline for many decades, while the rate for women rose consistently from 1960 to 1980 before slowing during the 1990s. And the more educated a worker, the more likely he or she will be participating in the labor market.

A Look at Fifth District Trends

We see similar trends within Fifth District labor markets. As in the national data, the labor force participation rate declined in each of the district jurisdictions from 1997 to 2017 — with the exception of the District of Columbia, where the rate increased sharply. The largest declines were in the Carolinas, where the participation rate dropped close to 7 percentage points. Declines in other states were much less severe — 3.6 percentage points in Maryland, and 2.2 percentage points in Virginia and West Virginia. (See chart below.) The participation rate itself also varies considerably, from West Virginia's 53.3 percent to the District of Columbia's 70.4 percent.

What is Driving the Differences Among Jurisdictions?

Not surprisingly, many of the same demographic factors as on the national level are at work. One is education. As noted earlier, workers with higher levels of education are more likely to be in the labor force and employed.

In terms of education, West Virginia stands out in that the percentage of its population aged 25 or older with less than a high school education is the highest in the Fifth District, although South Carolina is not far behind. Also, the percentage of the Mountain State's population with only a high school degree is the highest in the region by a considerable margin — 41 percent versus an average of 25 percent for the other five jurisdictions. At the same time, the percentage of workers with college or advanced degrees is the lowest.

Still, other factors must be at work as well. Even when looking at participation rates by education level, West Virginia is still lower than the rest of the Fifth District, and this is true across all education levels. Most notably, only 36 percent of West Virginians with less than a high school diploma were in the labor force versus an average of 60 percent for the rest of the Fifth District. In contrast, the District of Columbia has the highest participation rate and the highest percentage of people with college and advanced degrees — as well as the lowest percentage of the population with high school diplomas or less. (See chart below.)

Much like the national picture, changes in participation rates by age and gender as well as the aging population help to account for recent trends in the Fifth District. The aging of the baby boomer generation is at work within the region, with one notable exception — the District of Columbia, which has been getting younger. From 2005 to 2017, the percentage of the population 55 or older increased between 5.6 percent in Virginia to nearly 7 percent in South Carolina. Moreover, within the 55 and older age group, the larger increase has been for the population above the age of 64 — whose participation rate is considerably lower. At the same time, in contrast, the median age in the District of Columbia fell by almost two years.

With regard to gender, too, the Fifth District largely parallels the nation. The region's participation rate for males aged 20 to 64 declined by 2.7 percentage points from 2005 to 2017. This was partially offset by an increase in the participation rate of females by 2.2 percentage points. The male participation rate remained considerably higher than the female participation rate, though the gap has declined — the average difference across Fifth District jurisdictions was 7.3 percentage points in 2017, down from 12.2 percent in 2005.

In addition to demographics, what other factors may be influencing labor market outcomes in the Fifth District? Job polarization within the region appears to be a factor behind the decline in the participation rate of males. Richmond Fed research has found that, with the exception of the District of Columbia, the middle-salary occupation group has grown more slowly than higher- and lower-salary occupations. This is consistent with the notion that increases in technology were displacing middle-skill employment. (See "Post-Recession Labor Market Trends in the Fifth District," Econ Focus, Third Quarter 2015.)

Another factor is the opioid crisis. The hardest-hit jurisdiction in the Fifth District, West Virginia, has seen improvements. The usage rate there was exceedingly high in the late 2000s, peaking at 146.9 prescriptions per 100 people in 2009 — 1.8 times greater than the national average. It has since dropped sharply to 81.3 in 2017, which is still significantly greater than the U.S. average, but the gap has shrunk. The high usage rates along with anecdotal information from businesses, nonprofits, and hospitals within the Fifth District suggest opioid usage did hurt the supply of labor. However, the scale of this effect is difficult to assess.

Conclusion

The labor market continues to tighten, with strong job growth and an unemployment rate nearing lows not seen since the late 2000s and 1960s. Much of the explanation for the changes in participation lies in long-term secular trends, demographics in particular. An aging population has had an enormous impact, but the participation rates of young workers and older workers have had a noticeable impact as well.

The long-term decline in the participation rate of men is less well understood. Job polarization, the impact of trade on manufacturing, the rise in disability, and the opioid crisis have been looked at as possible explanations. There is some evidence that suggests job polarization and opioid usage are factors affecting the district's labor market.

The changing age profile of the Fifth District, changes in participation rates by age and gender, and differences in educational attainment are large factors underlying participation rates across the region.

Note: This report contains excerpts from a recent Econ Focus article, which can be found here.


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Views expressed are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of Richmond or the Federal Reserve System.

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