CBO’s Long-Term Projections of Labor Force Participation

Posted by Joshua Montes, Xiaotong Niu, and Julie Topoleski
January 13, 2017 - Congressional Budget Office

In preparing the economic forecast underlying its forthcoming report on the budget and economic outlook, CBO updated its projections of labor force participation. In this blog post, we explain those updates and compare them with the agency’s previous projections and with those of the Social Security Trustees. The full economic forecast will be described in The Budget and Economic Outlook: 2017 to 2027, which will be released on January 24.

What Are CBO’s Current Projections of Labor Force Participation?

CBO projects that the rate of labor force participation (that is, the number of people who are either working or seeking work as a share of the civilian noninstitutionalized population age 16 or older) will decline from 62.8 percent in 2017 to 61.0 percent in 2027 and to 59.2 percent in 2047—constituting a drop of 3.7 percentage points over 30 years (see the figure below). The projected decline in the participation rate is faster for men than for women.

The continued retirement of the baby-boom generation is the most important factor driving down the overall participation rate. To assess the importance of that factor, CBO has calculated what the participation rate would be if the age-and-sex composition of the population remained the same as what it will be in 2017. With that adjustment, the projected participation rate would rise slightly between 2017 and 2027 and would end up at the same level in 2047 as it will be in 2017 (see the figure below). Because that calculation includes an adjustment for age and sex but the sex composition of the population is projected to change only slightly, the analysis implies that the effect of the aging of the population is about equal to the difference between the unadjusted and adjusted rates. Therefore, aging essentially accounts for the decline of 3.7 percentage points over the next 30 years.

For men, CBO anticipates a steady decline in the age-adjusted participation rate over the 30-year projection period. For women, the agency projects an increase over the first 10 years of the period and then a relatively steady rate thereafter.

The flattening of the overall participation rate over the next 30 years, with a constant age-and-sex composition assumed, reflects the offsetting effects of several trends, some that push the participation rate down and others that push it up. CBO projects continued downward pressure on the participation rate from three trends. First, the members of subsequent generations, who are replacing baby boomers in the labor force, tend to participate in the labor force at lower rates. Second, the share of people receiving disability insurance benefits is generally projected to continue increasing, and people who receive such benefits are less likely to participate in the labor force. Third, the marriage rate is projected to continue declining, especially among men, and unmarried men tend to participate in the labor force at lower rates than married men.

CBO expects that those forces will be mostly offset by three trends working in the opposite direction. First, the population is becoming more educated, and workers with more education tend to participate in the labor force at higher rates than do people with less education. Second, the racial and ethnic composition of the population is changing in ways that increase participation in the labor force. Like the Census Bureau, CBO expects Hispanics to make up an increasing share of the population, which would increase the overall labor force participation rate, and expects non-Hispanic whites to make up a diminishing share, which would decrease the participation rate—resulting, on net, in an increase. Third, increasing longevity is expected to lead people to work longer.

How Have the Projections Changed Since Last Year?

CBO’s current projections of labor force participation at the end of the first decade are similar to those the agency made last year, but the agency now projects a slower decline thereafter. In CBO’s previous projections (in The 2016 Long-Term Budget Outlook), the labor force participation rate was 60.6 percent in 2026, compared with 61.1 percent in the current projections. In last year’s estimates, the projected rate fell by 3.7 percentage points between 2026 and 2046—a much larger drop than the 1.8 percentage-point decline between 2027 and 2047 in the current projections. The current projected decrease in the age-and-sex-adjusted rate is also slower than in last year’s estimate.

The changes since last year result from revisions in the estimated effects of several factors that influence labor force participation and from the addition of race and ethnicity as a factor in the analysis. Revised estimates of the effects of education and the marriage rate made the biggest difference. CBO now estimates that increasing educational attainment has a larger positive effect on participation than it estimated a year ago and that the declining marriage rate has a smaller negative effect. In addition, as explained, incorporating race and ethnicity in the projections of labor force participation increases the overall participation rate.

How Do CBO’s Projections Compare With Those of the Social Security Trustees?

CBO projects a lower rate of labor force participation than do the Social Security Trustees. Both CBO and the Trustees expect the overall participation rate to decline significantly from today’s value of 62.8 percent primarily because of the effects of an aging population. Whereas CBO expects the participation rate to drop to 59.2 percent in 2047, the Trustees project 61.1 percent for that year. Adjusted to exclude the effects of the changing age-and-sex composition of the population, CBO’s projected rate is below the Trustees’ beginning in 2019. For 2047, CBO projects an adjusted rate of 62.8 percent, similar to the average over the past 30 years, but the Trustees project an adjusted rate of 64.9 percent, higher than any experienced in recent decades (see the figure below).

Those differences result from differences in the projections for male labor force participation (see the figure below). For men, CBO expects the age-adjusted rate to continue its decline at a pace similar to the average over the past 30 years. In contrast, the Trustees expect that the rate will return to its prerecession level by the end of 2027 and then continue rising, although at a slower pace. For women, CBO and the Trustees project very similar age-adjusted participation rates. Both CBO and the Trustees expect that within the next few years, the age-adjusted rate for women will fully recover from the drop during the 2007–2009 recession and will stabilize at about 2 percentage points above its previous peak.

Joshua Montes is an analyst in the Macroeconomic Analysis Division. Xiaotong Niu is an analyst in the Health, Retirement, and Long-Term Analysis Division. Julie Topoleski is the chief of the Long-Term Analysis Unit in that division. Numbers may not add up to totals because of rounding. Data underlying the figures in this post are available.