Section 3: Feature article

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Recent trends in Canada's labour force participation rate

by Diana Wyman ¹ 

Employment levels and the labour force participation rate increased rapidly from 1997 to 2003. From 2003 until the onset of the recession in the third quarter of 2008, however, employment gains continued while the labour force participation rate was broadly stable. This paper reviews trends in the labour force participation rate from 1997 to the third quarter of 2011 and explores possible explanations as to why the participation rate was no longer increasing even before the onset of the 2008-2009 recession. ² 

Overview

The overall labour force participation rate is a ratio of the number of individuals in the labour force at a point in time, comprised of individuals either employed or unemployed (and looking for work), and the number of individuals that are aged 15 and over, the working age population. The overall labour force participation rate sometimes demonstrates a pro-cyclical pattern, rising when the economy is expanding (when labour force growth is outpacing population growth), such as from 1997 to 2003, and falling when it is contracting (when labour force growth falls behind population growth), such as during the 2008-2009 recession. However, there are countercyclical and longer-term structural forces at work as well, which make the analysis of the labour force participation rate more complex.

Most notably, the ongoing aging of the population is lowering the labour force participation rate as an increasing number of people enter their retirement years. This effect can be illustrated by comparing the overall labour force participation rate with the participation rate weighted to reflect the composition of the working age population as it was in 1997 (one of many possible base years); it becomes evident that the labour force participation rate would have been higher if not for the shift of the population between 1997 and 2011 into age groups that have a lower participation rate. ³  As Figure 3.1 shows, without this effect, the participation rate would currently be about three percentage points higher.

The next section reviews trends in the labour force participation rate from 1997 (the year that rapid growth began) until the onset of the 2008 recession, and from the 2008-2009 recession and recovery to the third quarter 2011. It compares the actual labour force participation rate with the weighted labour force participation rate that holds constant the composition of the working age population in 1997, removing the dampening effect of the aging population.

Before the 2008-2009 recession

From 1997 to 2003, the overall labour force participation rate rose from 64.7% to 67.6%, surpassing its previous record high of 67.4% in the late 1980s. The 2.9 percentage point increase in the labour force participation rate was the second highest on record, and was spread among all major age groups, as shown in Figure 3.2. ⁴ 

From an all-time low in 1997, the labour force participation rate of youths (age 15 to 24 years) rose 6 percentage points by 2002. During this period, the share of youths enrolled in full-time study fell (measured by the school enrolment rate) and the participation rate of non-students and part-time students in the labour force increased from 85% to 87.4%. As well, the participation rate of full-time students rose to 45.5%. These labour force participation rates were historically high, with only a few years in the late 1980s reporting higher rates. Therefore, after controlling for the decline in school enrolment, labour force participation for youth rose each year during this period.

The participation rates for core working age men and women, age 25 to 54 years, increased to 91.7% and 81.7% respectively from 1997 to 2003 (shown in Figure 3.3), a reversal of the long-term decline in core working age men's participation rate and an acceleration of women's labour force participation to a new high.

After declining steadily for the two previous decades, the participation rate of the 55 years and over age group posted modest gains from 1997 to 2001. In 2002 and 2003, labour force participation rate growth for this group accelerated, rising 2 percentage points each year compared to an average annual increase of 0.5 percentage points from 1997 to 2001.

From 2003 to 2007, during one of the tightest labour markets on record, the overall labour force participation rate remained at or below the 2003 high of 67.6%. It is important to keep in mind that when there is no change in the labour force participation rate, this means that labour force growth kept pace with but did not exceed or fall behind population growth. During this period, labour shortages were commonly reported in the Prairies, with interprovincial migration reaching levels unseen since the 1970s, reflecting individuals' willingness to seek employment in another province by either traveling or relocating (primarily to Alberta). As well, the national unemployment rate fell to a historic low of 6%, and even lower for many age groups. ⁵ 

Despite the labour shortages, the labour force participation rate fell to 66.9% by 2006. Rather than indicating a softening of the labour market, this decline suggested that it was becoming difficult to draw a greater share of the population into the labour force even when labour market conditions were buoyant. School enrolment rates for youths rose slightly, depressing their labour force participation rate. The participation rate of non-students and part-time students was down from its 2002 high. Core working age men and women also gave back some of their earlier gains. The participation rate of the 55 years and over group, which had accelerated from 2001 to 2003 (partly as a result of the negative impact of the stock market correction during that period on savings and pensions), slowed during this period. ⁶ 

In 2007, the overall participation again began to increase, rising to a new record high of 67.7% in the first and second quarters of 2008. School enrolment again dipped as younger workers' employment prospects improved. Full-time students posted a record high participation rate of 46.8%; the participation rate of other youths also increased. The core working age men's participation rate returned to its previous high, while core working age women's participation rose to a new high of 81.3%. The participation rate also rose for the 55 years and over group in 2007 until the second quarter of 2008, before an outright decline in their participation rate at the onset of the recession in the third quarter of 2008. The participation rate of older workers has rarely fallen in the last decade, occurring only two other times (in the first quarter of 2001 at the onset of a cyclical slowdown and in the fourth quarter of 2005). The decline in their labour force participation rate coincided with a peak of 192,000 retirements declared in the Labour Force Survey in the third quarter of 2008. While the number of retirements has followed an upward trend since 2001, the number of retirements failed to reach this level again in the past three years.

The impact on the overall labour force participation rate from the aging population became evident in the late 1990s as the first baby boomers turned 55 years old. It has since meant larger declines and smaller increases in the participation rate every year. From 2003 to 2008, the impact of the aging population on the participation rate accelerated compared to 1997 to 2002. Without the dampening effect of the aging population, the participation rate would have risen further to nearly 69% by 2003 and, after dipping in 2005 and the first part of 2006, continued to rise to 70.2% by 2008.

The 2008-2009 recession and subsequent recovery

During the 2008-2009 recession, the overall labour force participation rate fell from 67.7% to a low of 66.8%, where it has remained since that time. This 0.9 percentage point decline in the labour force participation rate was one-third the size of the drop that occurred after the onset of the 1990-1992 recession but was similar to that of the 1981-1982 recession. As well, while employment and participation rates returned to pre-recession highs simultaneously in the 1981-1982 recession (partly aided by the growing share of baby boomer women entering the labour force relative to the preceding group), the participation rate after the 1990-1992 recession did not begin to grow until several years after employment recovered (partly delayed by public sector downsizing). From these other two recessions, there is no consistent pattern indicating how employment and the participation rate should relate to each other. ⁷ 

The participation rate of youths fell 3 percentage points between the third quarter of 2008 and the fourth quarter of 2009 and a further percentage point by the fourth quarter of 2010. There was a sizeable increase in the full-time school enrolment rate, from 56.2% in 2008 to 58% in 2010. Controlling for this increase in enrolment, the participation rate decline would be closer to 2%. Full-time students' participation rates retreated from their historic high in 2007, giving back just over one-third of the gains accumulated since 1997 by 2010. Other youths (not enrolled in full-time studies) returned half of their gains by 2010, however, their participation rate showed considerable strength so far in 2011, rising to 87.4%, surpassing that of 2007 (Figure 3.4). ⁸ 

From 2008 to the end of 2010, the labour force participation rate of the core working age group fell 0.5 percentage points to 86.2% in 2010 and has since edged up to 86.3%. There was no change in the labour force participation rate for core working age men and women in 2008, as slight declines in men's participation rate were offset by an edging up of women's. As 2009 progressed, the men's participation rate fell below 91% while the women's rate increased to a new peak of 82.6%. This type of countercyclical increase is often associated with the added worker effect, a temporary rise in labour force participation to smooth household income after a spouse's job loss. The women's participation rate then returned to 82.2% and stabilized at this rate in 2011, suggesting that the recession overall had a relatively neutral impact on this group's participation. While the participation rate of core working age men has hovered around 90.5% in 2010 and 2011, their unemployment rate dropped 2.2 percentage points to 6.1%. Unemployment for core working age women peaked at 6.4% but had fallen to 5.7% as of the third quarter of 2011.

The labour force participation rate of the 55 and over age group continued to increase during the 2008-2009 recession, although at half the pace of the previous two years. In the first three quarters of 2011, the labour force participation rate of the 55 and over age group fell in the first and third quarters, dampening the overall participation rate. Over the past decade, there have been only six outright quarterly declines in older men's participation rate; for women, only five decreases. Two of the six declines for men occurred in 2011 and have not been offset by any gains; the largest drop in 30 years occurred for women in 2011.

The decline in the weighted participation rate during the 2008-2009 recession was less than the actual, falling 0.5 percentage points to 69.7% (compared to 0.9 percentage points) between the third quarters of 2008 and 2009. It also has differed in the recovery. Since the third quarter of 2009, the weighted participation rate has hovered at or above 69.9% (with the exception of the fourth quarter of 2010) while by the third quarter of 2011, the actual overall rate had edged down 0.1 percentage point from its cyclical low. While this difference is subtle, it is the difference between the participation rate continuing to edge down and remaining stable since the recovery began.

Explaining the effect of the changing age composition of the working age population

Because participation rates vary greatly by age, changes in the age structure of the population have a large influence on participation rates. The share of the working age population accounted for by youths and core working age men and women have been shrinking. Between 1991 and 1999, all of the baby boomers (born between 1945 and 1966) were of core working age. The core working age group now includes 14.5 million people, including the 5.3 million baby boomers born between 1957 and 1966. In the late 1990s, the core working age group's share of the working population peaked at 58%; it has since declined to 52% as the oldest of the boomers have begun exiting this group. Youths now account for 16% of the working age population, down from 27% in 1976.

The core working age group has the largest number of individuals in the labour force, resulting in their very high labour force participation rate, currently hovering above 86%. The youth group tends to have lower participation as full-time students are included, who tend to be out of the labour force for at least part of the school year and in the labour force during the summer months; when only non-students and part-time students are examined, the participation rate is similar to the core working age group.

The dynamic of the 55 years and over population is different, as it largely includes individuals who may not have any relationship with the labour force. In 2011, those born in 1946, the front end of the baby boomer generation, turned 65 years old. Of the entire working population (those 15 years of age and over) of 27.7 million people, 4.5 million are 65 years or older, of whom only 11% participate in the labour force. Another 4.2 million people are 55 to 64 years of age. Roughly 63% of this group participated in the labour force. Together in 2011, the 55 years and over group form one-third of the working age population, up from one-quarter fifteen years earlier.

Not surprisingly, individuals at 60 years of age have a lower participation rate than their 55-year old counterparts and individuals at 65 years have a lower participation rate than 60 year olds. In 2011, those aged 55 to 59 have a participation rate of 72%, about 14 percentage points lower than those of core working age. Each successive age group has a progressively lower participation rate, with 50% of 60 to 64 year olds participating in the labour force, 22% of 65 to 69 year olds, and 5% of those 70 years and over. As a result, those 55 and over have a much lower participation rate (36%) than those of core working age (86%). The rising share of older workers of the working age population dampens the overall participation rate as these individuals will be in lower numbers in the labour force but will remain in the working age population aged 15 and over.

There is a tendency to view those who are not in the labour force as individuals that would enter it given the right conditions. However, a larger proportion of this group is increasingly comprised of older individuals who have either left the labour force with no intention of future attachment or who intend on remaining in the labour force but working more selectively during a calendar year than in the past. The 55 years and over age group accounts for an increasing share of those who are not in the labour force, comprising nearly 62% in 2011, up from 55% fifteen years ago and 40% thirty-five years ago. Just over 85% of these individuals that are 55 years and over have not been in the labour force for at least one year, demonstrating a reduced attachment to the labour force. Others are in and out of the labour force: men age 55 to 64 years, in particular, are entering the labour force for the winter months and exiting the labour force for the summer months. There was a 2 to 3 percentage point decline in their participation rate from April until September in 2009 and 2010 with a return to the previous rate (or slightly higher) from October to April. ⁹ 

Youths account for just under 20% of those outside of the labour force, with the vast majority (about 85%) full-time students. While students often opt out of further schooling when jobs are plentiful, the changes tend to be marginal relative to the number of individuals enrolled in school. For the core working age group, 13.3% of this group remained outside of the labour force during the period of intense labour shortages prior to the recession; currently, 13.7% of this group is outside of the labour force. Of those in the labour force for this age group, only 6% are unemployed (while the other 94% are employed), compared to a recessionary high of 7% and a historic low of 5% prior to the 2008-2009 recession.

Conclusion

This article highlighted that the labour force participation rate is exhibiting a different relationship to the business cycle than it has in the past. While economic growth usually is accompanied by rising participation rates, since 2003, the aging of the population appears to have offset much of this effect. Moreover, the changing mix of cyclical and structural influences on the participation rate of various employment groups implies that extrapolating future trends in the participation rate from past experience should be done with caution.

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