The 2020 Long-Term Budget Outlook

Aside from the aging population, CBO expects the effects of other demographic trends, economic trends, and current fiscal policies on labor force participation to largely offset one another in future decades. In particular, two long-run trends are expected to put downward pressure on the participation rate:

  • Members of each generation that follows the baby boomers (particularly men) tend to participate in the labor force at lower rates than their predecessors did at the same ages. (One notable exception in later generations is that the share of women age 34 or younger who work is higher than it was for baby-boomer women at the same ages. However, as those later generations of women have aged, their participation rates have also fallen below those of their predecessors.)
  • The marriage rate is projected to continue to fall, and unmarried men tend to participate in the labor force at lower rates than married men.

CBO expects those forces to be mostly offset by two trends that it projects will increase participation in the labor force:

  • The population is becoming more educated, and people with more education tend to participate in the labor force at higher rates than do people with less education.
  • Increasing longevity is expected to lead people to continue working to increasingly older ages.

In addition to the effects of those demographic trends, budgetary effects and incentives under current tax law, combined with economic trends, also affect the labor force. For example, growing federal deficits are projected to slow growth in the stock of private capital and to limit the growth of wages, thereby reducing the supply of labor. In addition, as people’s income rises faster than inflation, more of their income is pushed into higher tax brackets through a process known as bracket creep, raising their effective tax rates. Higher tax rates and bracket creep are projected to decrease participation in the labor force because individuals would earn less return on their labor.

Changes in Projections of Labor Force Participation Since Last Year. CBO’s current projection of the overall labor force participation rate is significantly lower than it previously projected for 2020 to 2025 and slightly lower, on average, than the agency projected for 2026 to 2049. The agency lowered its projection of the labor force participation rate in the near term because of the effects of the pandemic. In addition, many workers near retirement might choose to retire early because of the pandemic. The drop in participation over the next five years is projected to be slightly offset by data showing more labor force participation than CBO projected in 2019.

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