Labor force participation among prime-age workers has climbed over the past few years, reversing from the substantial drop during and after the last recession. These gains might suggest that the strength of the job market is pulling people from the sidelines into the labor force. However, analysis that accounts for underlying flows between labor force states shows that, rather than drawing new people in, the hot labor market has instead reduced the number of individuals who are dropping out.
Historically, the proportion of the working-age population that participates in the labor market has not moved significantly with the ups and downs of the economy. However, this appears to have changed during the current economic expansion for workers ages 25 to 55, the prime-aged population that makes up the bulk of the workforce. Figure 1 shows that, after the sharp decline in labor force participation (LFP) during the Great Recession of 2007–09, the rebound over the past few years has been striking. The rising participation rate has led some observers and policymakers to conclude that some meaningful slack or excess capacity still exists in the labor market, even though the national unemployment rate is close to its lowest levels over the past 50 years.