BofA: 4 Reasons Why The Drop In labour Force Participation Rate Will Not Last

labour force participation is at its lowest level in three decades. It has been argued that the drop is due to an ageing population, which could be a long-term shift. 

But Bank of America/Merrill Lynch’s U.S. Economics team thinks there’s more to it than ageing.

From a recent note to clients:

The four reasons we believe that the drop in the LFPR is not permanent:

1. The drop in the participation rate coincides almost exactly with the collapse in employment. How is this structural? And if a strong job market attracted extra people into the market when times were good, why wouldn’t it happen again if this job recovery becomes well established?

2. The drop in the participation rate is happening in many age cohorts. Population shifts into historically lower age ranges is a small slow-moving factor that will extend over a generational period of 25 years or so.

3. The permanent drop argument ignores the shock to household wealth and confidence. Once the period of distress is over and job opportunities return, don’t people have a lot of catching up to do? Or do they simply resign themselves to a much lower standard of living in retirement, even as
Medicare spending is cut and taxes increase?

4. Doesn’t it make sense that the duration of unemployment is driving the participation rate lower? If I spend two years sending out resumes with almost no response, don’t I give up or go back to school? Isn’t the surge in student loans telling?

The team notes that the unemployment rate is likely to rise once the LFPR comes back.  Here’s a chart BOA/Merrill Lynch on how well unemployment and labour participation have tracked each other:

labour Participation vs. Unemployment

Photo: Bank of America/Merrill Lynch



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