Institute of Social and Economic Research (ISER) Associate Professor of Economics, Dr. Mouhcine Guettabi, recently released his report, A simple decomposition of Alaska’s labor force participation rate, which details his research surrounding the steady decline in the percentage of people working or seeking employment over the past two decades in Alaska and the implications of that downslide. Understanding these trends and the causes contributing to them is critical for managing and avoiding consequences to economic growth and development, tax revenues, and government services. He also weighs the use of unemployment rate as an indicator of economic health within a region and finds that this can be a misleading metric in this context. Learn more about Dr. Guettabi’s findings below and read his report, A simple decomposition of Alaska’s labor force participation rate, for an in-depth review.
Alaska’s labor force participation rate (LFPR) -share of people 16 years or older either employed or looking for a job- was 73.5% in 1999, but has experienced a steady decline since then, reaching 65% as of 2018. Figure 1 shows that the decline in men’s labor force participation rates was more pronounced than that for women. These reductions in LFPR can result in the slowdown of GDP growth as fewer people contribute to the production of goods and the economic returns generated by fewer workers must be spread more thinly via transfers through government programs.
Figure 1: Labor force participation rate in Alaska between 1999 and 2018
In a recent analysis, we find that the vast majority of states were experiencing participation rate declines between 2000 and 2010. In fact, 47 out of the 50 states experienced declines with Delaware having the most significant decrease and North Dakota experiencing the most significant positive shift, likely due to the shale revolution. In Alaska, the labor force participation started at 73.5% in 2000 and dropped to 69.6% by 2010 which represents a 5.3% decline.
In the period between 2010 and 2018, we find that Alaska’s labor force decline from 69.6% to 65% was the second highest, and represented a 6.6% decrease. The only state which experienced a more significant decline was Wyoming. Similar to the previous decade, 47 out of the 50 states had LPFR declines. Given the severe decline in oil prices in 2014, it is unsurprising that 3 out of the top 5 states with the highest labor force declines are energy-dependent states whose economies lost a considerable number of jobs between 2014 and 2018. Examining changes in the LFPR in the two periods highlights the sensitivity of the overall participation rate to not just demographics but also changing economic conditions. North Dakota’s situation is the most extreme as it went from having the fastest increase in the LFPR between 2000 and 2010 to having the third most pronounced decrease between 2010 and 2018.
A state’s labor force participation rate is the product of the size of the different demographic groups and their respective participation rate. Therefore, either changes in the size of the demographic groups or participation rate can influence the aggregate labor force participation rate. To determine the relative importance of the decline’s share that is due to population aging and the share due to declines in participation rates, we decompose this decline in Alaska’s LFPR. For the period between 2000 and 2010, we find that 93% of the drop can be explained by population shifts. These shifts are largely due to decline in the population share of those ages 35-44 years old who tend to have a high participation rate coupled with the increase in the share of those ages 55-64 and those 65 years and older. When we turn our attention to the 2010 and 2018 period, we find that population changes continue to play a role in explaining LFPR declines but their importance declined significantly as they only explain 55.3% of the change with the rest being explained by changes in participation rates across the groups. As we show in Figure 2, five of the seven age groups experienced participation rate declines with the individuals 65 and older being the only group to experience a sizable increase. This change in relative importance tells us that a portion of the Alaska population is choosing not to participate in the labor force and that, at least in the most recent decade, demand and supply factors are at play.
Figure 2: Alaska’s labor force participation rate by age group for 2010 and 2018
|Individuals aged 16-19||9.8%||8.1%||6.9%|
|Individuals aged 20-24||8.4%||9.3%||9%|
|Individuals aged 25-34||17.8%||19.1%||19.9%|
|Individuals aged 35-44||26%||17%||15.2%|
|Individuals aged 45-54||21.2%||19.1%||15%|
|Individuals aged 55-64||9.6%||15.6%||17.7%|
|Individuals aged 65 years and older||7.3%||11.8%||16.3%|
Understanding the declines in the labor force changes is important for economic growth and development, tax revenues, and government services. Additionally, these changes in the number of people either employed or unemployed and seeking employment influences the usefulness of the unemployment rate as a metric for an economy’s health. Between 2010 and 2018, the number of unemployed individuals decreased by 5,000 -a decline from 29,000 to 24,000- which can be attributed to a decline in the labor force by 3,000 and an increase in the number of employed individuals by 2,000 from 331,000 to 333,000. Therefore, a portion of the drop in the unemployment rate is due to reductions in the labor force and not to individuals becoming employed. If all the individuals that were in the labor force remained within it and the number of people whose status changed from unemployed to employed equaled 2,000 as it did between 2010 and 2018, then the unemployment rate would be 0.9 percentage points higher at 7.5% and not the 6.6% recorded in 2018. Because of these labor force changes, it may be more prudent to evaluate the economy’s health using employment changes along with other non-employment metrics.