The labor force participation (LFP) rate is the share of the population that is employed or unemployed and actively seeking employment. When individuals drop out of the labor force — due to retirement, disability or other life changes that will keep them at home and out of the workforce — the LFP rate falls.
The LFP rate has trended down since peaking in 2000 at just over 67% here in California. Some of this can be traced back to an aging population, though a steep drop occurred in 2009 during the Great Recession, the losses lingering during the long recovery that followed. During the last decade of recovery, California’s LFP rate has remained roughly two percentage points below the U.S. average.
Then, an even steeper drop in the LFP rate occurred during the 2020 recession, from 62.8% in February 2020 to 59.5% just two months later. Now, the LFP rate continues to rebound, at 61.4% as of October 2021. This lower LFP rate is a big reason why the unemployment rate recovered quicker than anticipated following the 2020 recession. That’s because when an individual drops out of the workforce, they are no longer included in the unemployment count, giving a false impression of an improving jobs market.
The more important figure for real estate is the number of employed individuals, and California employment has dropped from the peak 17.7 million in December 2019 to just under 16.7 million as of September 2020, reflecting just over one million Californians still without jobs who were employed at the close of 2019.
Real estate professionals who watch the LFP rate, along with jobs numbers, will find these trends more useful for forecasting future economic conditions than the misleading unemployment rate. Expect the LFP rate to continue its halting progress toward recovery in 2022, to return to pre-recession levels alongside the jobs recovery, expected around 2024-2025.
Updated November 19, 2021. Original copy released November 2020.
Chart update 11/19/21
Oct 2021 | Sep 2021 | Oct 2020 | |
| California labor force participation (LFP) rate | 61.4% | 61.3% | 60.8% |
| U.S. labor force participation (LFP) rate | 61.6% | 61.6% | 61.6% |
The global pandemic has upended employment expectations, especially for families with young children and those near retirement. Many working women (and some men) have given up employment income in order to care for children. Others who are near retirement age or with compromised immune systems have chosen to quit work in order to remain socially distant. With their exit from the workforce, the LFP rate has dropped, and the unemployment rate has recovered more quickly than would have been accomplished by the start-and-stop job additions of 2020-2021 alone.
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LFP and housing
The LFP rate’s long falling trend is worrisome for the housing market. Freddie Mac calls 2020’s steep detraction from the labor force a sign of “underlying weakness.”
When the LFP rate declines, so does household wealth, especially for that of middle-income households, which often rely on multiple streams of income in a single household. Declining household wealth spells trouble for the long-term health of the housing market.
Since the 1970s when women began to work outside the home in increasing numbers, household income has continuously climbed, rising by 21% in real terms from 1979 to 2018, according to Brookings.
But as women make up a disproportionate amount of those leaving the workforce in 2020, household incomes are suffering. Households with reduced incomes will see their housing options stifled.
Folks who chose an early retirement are seeing their housing options dwindling, as well.
Those who were forced into early retirement will enter the next phase of their lives with reduced resources. Many have not reached the age when they begin receiving benefits like social security. Still others were counting on a couple more years of saving before cutting off their streams of income.
When retirees can afford it, they will increasingly stay in their homes for longer, both to avoid moving during the pandemic and due to an increasing reliance on savings which otherwise may have gone toward their next move.
This will prove problematic to the new generation of homebuyers, who rely on a steady churn of housing to fill inventory gaps. New residential construction will need to occur to fill the holes left by aging adults stuck in place, though supply chain disruptions and labor shortages have derailed many new builds in 2021. Until these issues are resolved, the inventory shortfall will continue to hold back sales volume from reaching its full potential.
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