WASHINGTON (MarketWatch) — The last time there was such a small percentage of Americans in the work force, “Star Wars” was in the theaters and Reggie Jackson was breaking home-run records in the World Series.

The labor force participation rate declined by 0.3 percentage point in June to 62.6%, the lowest rate since October 1977.

What accounts for June’s downturn is likely to be the timing of school graduations — the seasonally adjusted participation rate of 16-to-19 year olds dropped sharply, to 36.7% from 37.4%. That’s even though the raw numbers showed, quite logically as some schools ended, a big upturn in participation to 43.4% from 36.7%.

The Labor Department calculates participation based on the week that includes the 12th of the month — in June, that was on a Friday, points out Betsey Stevenson, a White House economist. The earlier timing means that fewer graduates would be included in this month’s report.

But the bigger story in participation, the drop from Clinton-era participation in the 67% range, is a combination of baby boomers hitting retirement (the bigger factor) and other people who have given up trying to get a job.

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The resident working-age population, those between 18 and 64, is growing at a rate of about 0.5% per year, according to Census data. That’s down from 1% in 2007, and 1.5% in 1999. So even though today’s 65-plus segment is more likely to have a job than previously, the sheer numbers of those who are choosing to retire offset that impact.

Meanwhile, the percentage of those who aren’t in the labor force and who want a job, at 7.1% in June, is only slightly higher than the 6.8% rate in June 2007, before the onset of the Great Recession.

Whatever the causes, the drop in participation has important implications for both wages and the Federal Reserve’s interest-rate policy.

“A continued demand drag from a low secular labor force participation rate, which fell 3/10ths of a percent to a new 4-decade low of 62.6% in June, maintains a cap on wages,” wrote Lena Komileva, an economist at G+ Economics, in a note to clients.

“What does this mean for the Fed? Policy officials can sleep well at night knowing that their steady course is steering the economy in the middle, away from extreme deflation and hyper-inflation risks.”

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