This is the second of a three-part series about Idaho’s rural economy. This part evaluates which dynamics influence rural Idaho’s dwindling labor force.

Part one examines elements impacting Idaho’s rural economy today, including population, educational attainment, industries, occupations and wages.

Part three projects how rural Idaho’s population by age group and labor force participation will look in 10 years based on the previous 10-year trends.

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A lack of skilled labor is an ongoing struggle for Idaho’s rural economy. Idaho’s rural labor force has not grown since 2010; during the same period, the state’s urban labor force grew by more than 7 percent. The question of labor force is therefore critical to evaluating rural economies. Specifically, it is important to understand what caused stagnation in rural labor forces. In this analysis, we evaluate demographic and economic factors to determine whether rural labor force issues are caused by the usual suspects – aging and economic conditions – or whether there are other, undiagnosed problems. This analysis suggests that rural Idaho’s labor forces have declined for demographic and economic reasons, and not due to cultural or structural factors which are unique to rural economies.

Idaho’s unemployment rate – the ratio of the number of unemployed persons to the total number of participants in a labor market – is often viewed as the go-to measurement of economic health. Yet it can be misleading as the unemployment rate can decline both due to employment growth – unemployed persons finding work – and a decrease in the total labor force – unemployed persons stop looking for work altogether. The former case represents an increase in economic activity, while the latter does not.

For example, consider a hypothetical labor market with 5,000 participants, of whom 500 are unemployed. This results in an unemployment rate of 10 percent. If 100 of these unemployed persons were to find employment – with no accompanying change in the labor force – the unemployment rate would decrease to 8 percent. Yet the same unemployment rate would be achieved if 109 unemployed persons simply exited the labor force with no increase in employment. This example illustrates the need to evaluate other measurements of economic activity.

For this analysis, Idaho has six urban areas comprising seven counties: Kootenai, Nez Perce, Ada, Canyon, Twin Falls, Bannock and Bonneville. Collectively, total employment in these urban areas have grown by 30 percent since the beginning of 2000. Employment in the remainder of Idaho’s economy – the state’s rural counties – has grown only 15 percent over the same period. Furthermore, employment recovery from the recession of 2007-09 has been much stronger in urban counties than in rural areas. Idaho’s urban economy has grown 7.5 percent in total employment over the pre-recession peak; in rural counties, this recovery has been only 2 percent.

Despite the disparity in job growth, unemployment rates in rural and urban counties are roughly equivalent. The total unemployment rate in rural counties has remained only marginally higher than in urban counties; a trend that has persisted since 2010. The juxtaposition of these unemployment rates with the net growth in employment illustrates the need for deeper analysis. Quite clearly, falling unemployment rates in rural counties do not represent the same economic growth that we see in urban areas.

Rural counties have therefore underperformed on total job growth relative to urban counties while simultaneously keeping pace in regard to their unemployment rates. Mathematically, we would expect that rural labor force growth has also lagged behind urban areas. Indeed, this is the case. Since 2010, the urban labor force has grown by roughly 36,000 – an increase of 7 percent – while the rural labor force has not grown at all. In 2010, Idaho’s rural labor force was estimated at an annual average of 263,738; in 2015, this number was 263,725.

One useful measure of economic activity is the civilian labor force participation rate (LFPR), which measures the share of Americans over the age of 16 who are either employed or actively seeking employment. For decades beginning in the 1960s, this rate had a long-term pattern of increase, largely as a result of increasing working rates among women. The participation rate began to decline, however, at the end of the 1990s – the all-time high of 67.3 percent was reached in the early months of 2000.

The question of why labor force participation has decreased is one that remains unanswered in its entirety. It is clear, however, that demographics and aging play a significant role. The decision by an individual to participate in the labor force is influenced by many personal factors which vary by age and by gender – people drop out of the labor force to pursue education, to have children and to retire. Accounting for demographic factors can improve our understanding of labor force issues in rural counties, specifically, whether stagnant labor force growth in rural counties is a result of demography – an aging workforce leads to lower participation – or whether there are other structural factors at work.

To analyze this phenomenon, it is possible to use a detailed cross section of county populations, broken out into sub-groups according to age and gender – for example, females aged 40 to 44, males aged 25 to 29, etc. Each of these groups has an expected labor force participation rate, derived from national data. This level of detail allows for the construction of an expected labor force for each county based on the demographic composition. This expected labor force is then compared with the actual labor force over time.

This analysis suggests that labor force stagnation in rural Idaho can be explained by demographic factors. Rural counties have experienced substantial aging over the past decade as a result of generational dynamics – baby boomers are entering their retirement years – and migration as younger workers move to urban areas. This does not, of course, mitigate the challenge that aging workforces pose, but it does indicate that rural populations do not have a crisis of workforce participation. In other words, the populations of rural counties are aging, but they do not behave differently than we would expect given their demographics.

Furthermore, it appears that the labor force in rural counties responds to economic incentives in the same way that urban labor forces do. The difference between the expected labor force (based on demographics) and the actual labor force – called the labor force residual – can be interpreted as the participation (and nonparticipation) which occurs as a result of non-demographic factors. Among these factors, one of key interest is the strength of the economy – people are more willing to participate in the labor force when they are confident in their likelihood to find a job. We can examine this relationship empirically.

This analysis takes a cross-section of Idaho’s rural economy. The labor force residual is calculated for all of Idaho’s rural counties on an annualized basis from 2000 to 2015 and expressed as a percentage of the total expected labor force. A labor force residual higher than 0 percent indicates that, for a given year, a county had a larger labor force than would be expected based on its population and demographics. A labor force residual below 0 percent correspondingly indicates an undersized labor force. These labor force residuals are then plotted against the annualized unemployment rate for that county.

This analysis indicates that rural labor forces are responsive to local economic conditions. Higher local unemployment correlates strongly with an undersized labor force, providing an indirect way of observing the discouraged worker phenomenon, where workers drop out of the labor force in response to a weak labor market. This implication, however, does not answer the core purpose of the analysis, which is to determine whether labor forces behave differently in rural counties than they do in urban areas.

To answer this question, we conduct regression analysis  — regressing the labor force residual terms for all counties (rural and urban) and all observation years against their corresponding annualized unemployment rates (Rate), the average long-term labor force residual for that county (County Mean), and a binary variable (Rural) indicating whether a county is classified as rural or urban.

The important result of this regression analysis is the statistical non-significance of the binary variable indicating a county’s rural status. Colloquially, this means that a county’s responsiveness to economic conditions – the discouraged worker phenomenon – is not likely to vary between rural and urban areas. Rural workers respond to their local economic conditions in much the same way that their urban counterparts do.

The implication of this analysis is primarily that the labor force struggles faced by rural counties are not the result of intrinsic rural factors. Labor force growth in rural counties has stagnated, but this trend is a result of measurable forces. Demographic changes like aging and migration patterns predict the observed flattening of rural labor force growth, and rural labor forces do not empirically appear to respond differently than urban labor forces to their local economic conditions. This suggests that the challenges faced by rural economies – especially the challenge of attracting and retaining younger workers – are, for the most part, exactly what they appear to be.

Sam.Wolkenhauer@labor.idaho.gov, regional economist
Idaho Department of Labor
(208) 457-8789 ext 4451