Figure 6 shows how states look when plotted in terms of the U-3 rate (the horizontal position) and workers part-time for economic reasons (the vertical position), both compared to a pre-recession average (calculated from 2005 to 2007). A large number of states are clustered in the upper right hand quadrant of the figure, indicating that both U-3 unemployment and those who are part-time for economic reasons remain well above levels from before the recession. There is also a clear trend in the data, where states with U-3 unemployment well above that pre-recession average tend to have higher part-time workers relative to pre-recession levels. I would also point out that many of the states that have very high U-3 unemployment and workers part-time for economic reasons are states that were disproportionately impacted by the financial crisis (states such as Arizona, Nevada, and Florida).

Although the decline in the unemployment rate in part reflects an increase in employment over the past few years, it can also be traced to an unusually large drop in the labor force participation rate. Now, the majority of that decline over the past six years is due to structural factors, rather than cyclical. These include the first wave of baby-boomers entering retirement and the growing number of disability claimants among the working-age population.
There is, however, some non-participation in the labor market that appears to be cyclical. For example, the number of people in school and not in the labor force rose considerably over the past several years. We also see a large number of people who have dropped out of the labor force but still say they want a job. Combined, these groups account for a good part of the increase in non-participation not related to retirement. It’s likely that many of these people will come back to the labor force as job-seekers as the market improves. We can therefore think of them as a source of labor market slack that is not reflected in the official unemployment rate, though I’d stress that we can’t say precisely to what extent.

I think a lot of the declines in the participation rate are, in fact, demographic or structural, reflecting sociological trends. Many of the changes that we're seeing now we were also seeing to some degree even before the crisis. And we have a number of staffers here at the Fed who have studied participation rates and the like. So I think a lot of the unemployment decline that we've seen -- contrary to sometimes what you hear -- I think a lot of it really does come from jobs as opposed to declining participation. That being said, there certainly is a portion of the decline in participation which is related to people dropping out of the labor force because they are discouraged, because their skills have become obsolete, because they've lost attachment to the labor force, and so on. The Fed can address that, to some extent. If -- you know, if we're able to get the economy closer to full employment, then some people who are discouraged or who have been unemployed for a long time might find they have opportunities to rejoin the labor market. But I think fundamentally that training our workforce to fit the needs of 21st century industry in the world that we have today is the job of both the private educational sector and the government educational sector. We have many strengths in our educational sector, including outstanding universities, but we have a lot of weaknesses, as you know. There are many, many factors that affect participation, employment, wages, and so on, but the one I think that we can most directly affect is the skill level of our workforce. And that doesn't mean everybody has to go to get a Ph.D. People have different needs, different interests. But that, I think, is one of the biggest challenges that our society faces. And if we don't address it, then we're going to see a larger and larger number of people who are either unemployed, underemployed, or working at very low wages, which obviously is not something we want to -- we want to see.

Basically, an unemployment rate of 7.3 percent means that the U.S. labor market is far from healthy.
But I would say that this measure—troubling as it is—overstates the improvement in the U.S. labor market… Most of the declines in the unemployment rate since October 2009 have occurred because the fraction of people who are choosing to look for work has fallen.
…
It is true that, even without the Great Recession, demographic forces would have led to some decline in the employment-to-population ratio since 2007. As the baby boom birth cohort—born between 1946 and 1964—ages, the fraction of retirees in the population grows steadily. But these demographic forces are simply too small to account for much of the decline in the employment-to-population ratio that I’ve described.

Labor force participation has been declining on a trend-like basis in the United States for a while. That's the result mostly of demographic factors, partly the aging of the population, partly the fact that female participation is no longer increasing. It's, in fact, decreasing a little bit. It's also the case that the labor force attachment within people of working age has declined for a number of different reasons.

So there's a trend underlying this. And, in addition, there are probably some people who've left the labor force just because they're discouraged and they can't find work. So as the economy strengthens, the labor market strengthens, I would expect to see some of these folks coming back into the labor force. For example, the number of people who are out of the labor force but say they would like a full-time job and are not actually counted as unemployed, that number has actually been going up, which suggests that there are more people thinking about going back into the labor force, going back to work.

But I doubt that in the near term at least that we'll see an increase in labor force participation, because besides the effects of the slow recovery, high unemployment, we've had a downward trend in the U.S., which is not due to the recession. It's due to underlying demographic factors.

I'm also concerned about women and their declining rates of labor force participation, particularly in the key years of 30 to 45 or so.  Women make up more than half of our graduate schools and even in such areas as business and engineering, thier numbers are growing.  That's a lot of brainpower to lose if participation rates drop just as those women become experienced in their working situations.

As reported by Bloomberg

In this country, we have become accustomed to (net) increases in employment of at least 150,000-160,000 workers per month on average, roughly equal to the average monthly addition to the labor force. But labor force growth is projected to slow appreciably over the next ten years as the baby boom generation retires; depending on which reputable set of projections you select, we should probably expect monthly increments to the labor force of 110,000 on the low end to 150,000 on the high side. Increases in employment will adjust down similarly, other things equal, since people who are not available cannot be hired. Moreover, to the extent that labor force participation rates level off or decline—and this is widely anticipated in part because of the end of the run-up of participation rates of women—increases in the labor force will be even smaller than the estimates I just cited, probably by several tens of thousands per month.

Economists at the Federal Reserve have developed a model that combines information on the decline in labor force participation at older ages...with information on the changes in labor force participation across generations.  Exhibit 4 shows the actual participation rate, the model’s estimate of the underlying trend in the total participation rate between 1995 and 2006, and--under a specific set of assumptions--a projection of the trend out to 2015... Currently, actual participation is again above the estimate of the long-run trend, according to this model, largely because of the current strength of the labor market.

With regard to the labor force, research by the Board's staff highlights the role of demographic factors in determining the number of people available to work in the years just ahead. Most notably, the impending retirement of the baby boomers and the fact that women are no longer increasing their participation in the labor force at the rate they were in the past will tend to restrain the future growth rate of the U.S. labor force. All else being equal, these developments translate into a slower rate of growth of potential output.

With overall population growth continuing to slow and labor force participation not expected to rise, we probably need to adjust our benchmarks for what level of employment growth is consistent with economic growth near potential and a steady unemployment rate. It used to be that increases in payroll employment that averaged 150,000 per month were consistent with flat unemployment. Now that number may be closer to 100,000. These developments also imply that, in the absence of changes in productivity growth, our estimates of potential GDP growth should be revised down 2 or 3 tenths of a percentage point to a range of 3 to 3-1/4 percent.

At the Boston Fed we have begun to hear anecdotes about skilled labor being even harder to find and more expensive than earlier, but this is usually in the context of a continuing emphasis by businesses on working harder and smarter in the face of keen competition. It is also true that rather low labor force participation nationwide could suggest labor markets are less tight than the unemployment rate suggests.

Putting all these factors together — slower population growth, an aging baby boom generation, the plateauing of women joining the workforce, young people’s delayed entry, and the capping of immigrant inflows — growth in our nation’s labor force will almost surely drop below 1 percent in the decade ahead, perhaps significantly so.

If [the recent slow employment growth] is defined as a demand condition, perhaps poor job prospects have discouraged people from even attempting to find work. Will another year like 2005 reverse the recent trend? And does that mean that monetary policy should be accommodative until the economy is once again generating substantially more than 2 million new jobs per year? Alternatively, if the lower labor-force participation rate is defined as a supply condition, then it may be driven by younger workers' deferring entry into the labor force - perhaps to obtain more schooling and skills. If that is the correct explanation, then potential employment will be calculated much differently from the number we saw in the 1990s. In that case, attempting to spur more rapid job growth with an accommodative monetary policy is exactly the wrong thing to do. It will not accomplish the goal of maximum sustainable growth in the long run, and it may threaten our goal of price stability.

At the Chicago Fed, we've spent a good deal of time analyzing the long-term demographic trends, and our best judgment is that we will not see a big rebound in participation. This suggests that the current low levels of labor force participation are not indicative of a slack labor market.
 

As I have testified on numerous occasions, current entitlement law may have already promised to this next generation of retirees more in real resources than our economy, with its predictably slowing rate of labor force growth, will be able to supply...We owe it to those who will retire over the next couple of decades to promise only what the government can deliver. The present policy path makes current promises, at least in real terms, highly conjectural. If fewer resources will be available per retiree than promised under current law, those in their later working years need sufficient time to adjust their work and retirement decisions.