Fewer teenagers are participating in the labor force today than at any point since WWII. At just under 44%, teen labor force participation is 15 percentage points below its peak in the late 1970s. Why has there been a long-run secular decline in the work activity of young adults, and why has it sharply accelerated in the last five years?Labor market ; Employees, Training of

Daniel Aaronson

Daniel G. Sullivan

Kyung-Hong Park

English

Research Papers in Economics

Chicago Fed Letter
Explaining the decline in teen labor force participation
by Daniel Aaronson, senior economist and economic advisor, Kyung-Hong Park, associate economist,
and Daniel Sullivan, vice president and senior economist
Fewer teenagers are participating in the labor force today than at any point since WWII.
At just under 44%, teen labor force participation is 15 percentage points below its peak
in the late 1970s. Why has there been a long-run secular decline in the work activity of
young adults, and why has it sharply accelerated in the last five years?
ESSAYS ON ISSUES THE FEDERAL RESERVE BANK JANUARY 2007
OF CHICAGO NUMBER 234
Although teens represent
only 4.2% of the current
employed population, they
account for almost two-thirds
of the fall in aggregate labor
force participation since 2000.
In this Chicago Fed Letter, we provide an
overview of the decline in teen labor
force participation (LFP).1 After briefly
summarizing the facts, we discuss wheth-
er the large recent drop in participation
is a temporary product of a labor market
that is weaker than the unemployment
rate would suggest, or a more perma-
nent drop driven by the increased at-
tractiveness of study, changes in college
financial aid, or something else.
But first let’s motivate why this question
is worth considering. The key reason is
the sheer size of the decline of teen LFP
and consequently its impact on the over-
all LFP rate. Central bankers and others
often look to LFP to help assess the
state of the macroeconomy. The most
recent cycle is a case in point. The ag-
gregate LFP rate fell from 67.3% at the
beginning of the last recession in 2001
to 66% by 2004, and has barely budged
since. This could imply that labor mar-
kets are slacker than the relatively low
unemployment rate in 2006 suggests.
It is not clear, however, that the recent
drop in LFP is primarily the result of
weak labor demand. Fluctuations in LFP
also reflect several long-running cultural
and demographic trends unconnected
to the business cycle, highlighted most
recently by the aging population. Per-
haps surprisingly, teens have played a
large role in aggregate trends as well.
Although teens represent only 4.2% of
the current employed population, they
account for almost two-thirds of the fall
in aggregate LFP since 2000. Strikingly,
16–17 year olds, who account for only
1.7% of workers, explain about 45% of
the overall decline.2 A better understand-
ing of the forces shaping the LFP of
teens may shed significant light on how
to interpret trends in overall participa-
tion and, consequently, potential output.
The drop in teen LFP may also have im-
plications for future productivity growth.
In general, labor market experience
tends to raise subsequent earnings.
Moreover, it is easy to imagine that mod-
erate amounts of time devoted to a part-
time job during the summer or while in
school might inculcate good work habits
and allow young people to make more
informed educational and career choices.
Thus, it is possible that the reduction
in teen work may have some negative
effect on their future productivity. How-
ever, as we discuss later, the drop in
teen LFP appears to be at least partially
a product of an increase in school enroll-
ment rates that could ultimately boost fu-
ture productivity by a substantial amount.
Facts about employment of young
adults
Figure 1 displays the history of labor
force participation of those aged 16–19
and, as a comparison, those aged 20 and1. Labor force participation rates, by age
NOTE: The shaded areas are recessions as identified by the National Bureau of Economic Research.
SOURCE: Current Population Survey from Haver Analytics.
percent
1948 ’52 ’56 ’60 ’64 ’68 ’72 ’76 ’80 ’84 ’88 ’92 ’96 2000 ’04
40
45
50
55
60
65
70
16–19 year olds
20 year olds and older
older since 1948—the earliest year for
which we have Current Population Survey
data. The LFP rate is the share of non-
institutionalized civilians who are either
working or unemployed (available to
work and actively looking for work) in a
given month. As such, it ignores several
groups, including those under 16, in the
military, or in jail. Ignoring the latter
likely even understates the recent de-
cline in young adult LFP.
As the figure shows, there have been
long periods of expansion and contrac-
tion in youth participation rates. In the
years following WWII’s conclusion, just
over half of teenagers were in the labor
force. But, soon thereafter, teen LFP fell,
reaching a low of just under 45% in the
early 1960s. Over the next two decades,
teenagers slowly rejoined the labor mar-
ket, peaking at 59% in the late 1970s.
Since then, teen participation has pulled
back again, with LFP rates falling steadily,
punctuated by a particularly large de-
cline starting around 2000.
The broad swings in teen LFP may be
partially obscured by shorter-run fluc-
tuations associated with the business
cycle. Economic theory suggests that
teenagers turn to schooling activities
when labor market alternatives, and
therefore opportunity costs, are weak.
For example, one period where this mat-
ters a great deal is the late 1990s, when
we estimate that the booming econo-
my pushed up teen LFP by roughly
0.5 percentage points to 1.2 percent-
age points, thus exaggerating the de-
cline since then.
Of particular interest is the most recent
acceleration of this decline. Between
2000 and 2005, the teen LFP fell by 8.4
percentage points. Of this, we estimate
that roughly 1 percentage point is due to
the business cycle. In addition, if the sec-
ular trend in existence since the 1980s
had continued at the same rate, teen
LFP would have dropped by another
1.8 percentage points. That leaves 5.6
percentage points of the 8.4-percentage-
point fall since 2000 unexplained.
Explanations
It seems likely that the most important
factor behind the long-term decline in
teen labor force participation is the sig-
nificant increase in the returns to edu-
cation that began shortly before teen
participation peaked. The wage pre-
mium associated with a college educa-
tion is now nearly twice as high as in the
late 1970s, and teens appear to have re-
sponded to this development by spend-
ing more time in school. Indeed, school
enrollments have increased by roughly
25% since 1985, with much of the re-
cent increase the result of a major in-
crease in summer school enrollments.
Teens in school are much less likely to
participate in the labor force. Indeed,
the simple shift in the share of teens
enrolled in school can account for about
two-thirds of the decline in participation
through the mid-1990s. An additional
portion of the decline is attributable to
lower rates of participation among those
enrolled in school, which, to some ex-
tent, may be due to an increase in the
intensity with which enrollees pursue
their studies. Relatively little of the de-
cline is attributable to lower rates of
participation by those who are not en-
rolled in school.
Another possibility is that teens today
face greater labor market competition,
pushing down their prevailing wage
and discouraging some from working.
Indeed, teen wages have fallen a bit
over the last four years (see figure 2).
Yet, we find no compelling evidence that
associates the recent decline in teen par-
ticipation with greater labor market com-
petition due, for example, to larger
cohorts of teens or an increase in the
numbers of unskilled workers entering
the labor market because of the 1996 wel-
fare reform or changes in immigration.
In fact, teens’ relative share of the pop-
ulation has declined. This, coupled with
their greater incentive to allocate time
to school rather than work, suggests a
substantial downward shift in the relative
supply of teen labor. One might expect
this to raise the relative wage rate of teen
workers. And, indeed, as shown in fig-
ure 2, from the early 1980s until fairly
recently, the average hourly wage rate of
teens has risen a few percentage points
relative to prime-age workers without any
college education, although it has gen-
erally fallen relative to all adults. This
suggests either that the demand for teen
labor is relatively elastic (highly responsive
to small changes in the prevailing wage)
or that it also has been shifting down
over time. Both possibilities may be true.
A downward shift in demand for teen
labor would be consistent with the exist-
ence of skill-biased technical change—
the tendency for recent technological
innovations to raise the productivity of
highly educated workers relative to those,
like teens, who are less educated. Indeed,Michael H. Moskow, President; Charles L. Evans,
Senior Vice President and Director of Research;  Douglas
Evanoff, Vice President, financial studies; Jonas Fisher,
Economic Advisor and Team Leader, macroeconomic
policy research; Richard Porter, Vice President, payment
studies; Daniel Sullivan, Vice President, microeconomic
policy research;  William Testa, Vice President, regional
programs and Economics Editor; Helen O’D. Koshy,
Kathryn Moran, and Han Y. Choi, Editors; Rita
Molloy and Julia Baker, Production Editors.
Chicago Fed Letter is published monthly by the
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© 2007 Federal Reserve Bank of Chicago
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2.  Ratio of teen wages to low-skilled adult wages
SOURCE: Authors’ calculations based on data from the Current Population Survey.
ratio
1979 ’81 ’83 ’85 ’87 ’89 ’91 ’93 ’95 ’97 ’99 2001 ’03 ’05
0.50
0.54
0.58
0.62
0.66
teen wages/low-skilled adult wages
if any group should have had the de-
mand for its labor reduced by such a
development, it would be teens.
We also suspect the demand for teen
labor may be relatively elastic. A com-
pelling way to test such a hypothesis is
to look at what happens to work activity
in situations where there is a large and
exogenous increase in the supply of low-
skilled labor. One such event occurred
in the Miami metropolitan area in 1980.
David Card’s classic study3 showed that
a large influx of low-skilled labor from
Cuba had little impact on native LFP.
We have shown the same result for U.S.
teenagers (see note 1). Thus, the lack
of a large increase in relative wages of
teens in the face of a contraction in sup-
ply could also be due to highly elastic
demand for teen labor.
It is less clear how to interpret the sharp
drop in teen LFP that occurred between
2000 and 2003 and the lack of a signif-
icant rebound since then. There seem to
be two ways to interpret this discrepancy.
First, the trend rate at which teen par-
ticipation is falling may have accelerat-
ed. Instead of continuing to decline at
0.3 percentage points per year, as it had
since the 1980s, the teen participation
rate now may be falling at almost 1 per-
centage point per year. In that case,
current levels would be right on trend.
Second, the 5.6-percentage-point gap
between actual participation and what
would have been ex-
pected on the basis of
past trends may be due
to an extraordinary
amount of additional
labor market slack. In
this case, we would ex-
pect an eventual re-
bound in teen LFP as
this slack is worked off.
The weakness of teen
wage rates certainly
would be consistent
with some measure of
extra slack in their la-
bor market, though
one might reasonably
expect a larger wage
decline if the lower par-
ticipation rates were the
equivalent of an extra 5 or 6 percent-
age points of teen unemployment.
Moreover, there are other reasons to
doubt that a large part of the discrep-
ancy between actual and projected teen
participation is due to extra labor market
slack. Unlike the previous two recessions
(in 1990–91 and 2001) and the periods
afterward, in recent years there has been
no significant increase in the portion
of nonparticipating teens who, though
out of the labor force, report that they
actually want a job. Thus, the teen pop-
ulation does not seem to feature an
unusually large number of discouraged
workers. Finally, the industries that tend
to employ the most teens (e.g., restau-
rants, grocery stores, construction) have
been experiencing above-average em-
ployment growth. If teens have seen a
weakening in the demand for their labor,
it is not because the industries they usually
work for have been performing poorly.
Therefore, we tend to place more weight
on the possibility that the trend decline
in teen participation has accelerated
recently. But, we freely admit we have
little evidence to explain the accelera-
tion. In particular, the returns to educa-
tion, while still high, have not increased
especially rapidly in recent years. Per-
haps the recognition that schooling pays
off is finally reaching the broad teen
population. Indeed, school enrollment
rates have increased at a one-third faster
rate since 1997 compared with the pre-
vious ten-year period. This is largely driv-
en by a rapid increase in enrollments
during the summer months—44.3% in
2005 versus 20.5% in 1992. However,
increases in the enrollment rate only
explain about 0.5 percentage points of
the 5.6-percentage-point gap between
actual and projected 2005 teen LFP.
Merit aid and youth employment
Another factor that might have acceler-
ated the decline in the teen LFP over the
last decade is a decline in the net price
of college. This is somewhat counter-
intuitive. Clearly, the list prices of highly
ranked colleges have shot up. But there
are at least two offsetting factors that
have potentially lowered the cost of go-
ing to college for many students: the
decline in community college prices,
particularly in the 1990s, and the intro-
duction of large statewide merit schol-
arship programs in the past decade.
Many states now have large merit schol-
arship programs (often called Hope,
after Georgia’s program) that offer stu-
dents free or highly reduced tuition to
in-state universities, regardless of family
income, so long as they meet minimum
entrance requirements and college per-
formance criteria.4 For our interests,1 For a more detailed review, see Daniel
Aaronson, Kyung-Hong Park, and Daniel
Sullivan, 2006, “The decline in teen labor
force participation,” Economic Perspectives,
Federal Reserve Bank of Chicago, Vol. 30,
No. 1, First Quarter, pp. 2–18.
2 The aggregate LFP rate fell 0.9 percentage
points, from 67.1% in 2000 to 66.2% in
September 2006. However, excluding
16–19 year olds (or alternatively 16–17
year olds), the decline is only 0.3 percent-
age points (0.5 percentage points).
3 David Card, 1990, “The impact of the Mariel
boatlift on the Miami labor market,”
Industrial and Labor Relations Review, Vol. 43,
No. 2, pp. 245–257.
4 For our recent paper on the effects of these
programs, email daaronson@frbchi.org.
the scholarships have two features that
are critical. First, because the sums are
sizable, Hope scholarships may have
reduced the need for students to earn
money for college. Second, the minimum
grade standard introduces a financial
incentive for students in danger of being
on the wrong side of this threshold. Both
effects provide disincentives to perform
market work.
Using a variety of identification strate-
gies, we find evidence that teen and
college-age work participation falls by
at least 1 to 2 percentage points in states
with merit aid programs. To take one
dramatic example, students eligible for
Pell Grants in Georgia were not initially
eligible for additional funds from Hope.
But beginning in 2000, this restriction
was eliminated, and, as predicted, work
activity declined precipitously for the
Pell-eligible (and now Hope-eligible as
well) group, relative to non-Pell students
and Pell students in neighboring states.
Given that 20% to 25% of youths now
live in states offering significant merit
aid programs, we estimate that Hope
could explain up to 0.5 percentage points
of the unexplained 5.6-percentage-
point decline in teen LFP during this
economic expansion.
Conclusion
Only time will tell whether the large drop
in teen labor force participation of re-
cent years is a temporary product of a
labor market that is weaker than the
unemployment rate would suggest, or
a more permanent drop driven by the
increased attractiveness of study, changes
in college financial aid, or something
else. The available evidence does seem
to suggest, however, that the decline in
participation is being accompanied by
increases in human capital investments
that may add to the future productivity
of today’s teens.

Explaining the decline in teen labor force participation

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Explaining the decline in teen labor force participation

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