The Ins and Outs of Labor Force Participation

Abstract

In this note, I decompose LFPR movements into the contributions of the inflows into participation --the Ins-- and the outflows out of participation --the Outs--. Contrary to conventional wisdom, movements in the outflow rate account for most of the variation of the labor force participation rate: the LFPR increases in tight labor markets because fewer workers leave the labor force, not because more nonparticipants enter. The cyclicality of the outflow rate is in turn mechanically driven by a composition effect: in tight labor markets, job seekers find jobs faster and as a result become less likely to leave the labor force.