On Friday, the unemployment rate dived from 6.7% to 6.3%. But the good news was tempered by the massive 800K drop in the size of the Labour Force, as the US Labour Force Participation Rate continues to drop.
The extent to which the declining Labour Force Participation Rate is structural (a result of demographics and a changing society) or cyclical (a result of a weak economy and people just “dropping out”) is something that’s been debated furiously for years now. And as long as we keep getting reports like Friday’s, we’ll keep having this debate.
There’s almost certainly an element of both, so the question is: what’s the mix of the two?
Goldman’s Jan Hatzius argues that a fair amount is cyclical (the result of a weak economy).
Via Calculated Risk, he writes that the decline is unlikely to continue. One reason is that the aggressiveness of the decline is a function of people retiring early, which means that there will be fewer than expected retirements in the future. Other cyclical patterns (such as people going on disability or people going into school to avoid working are also abating).
Since the start of the Great Recession in late 2007, the labour force participation rate has fallen by more than three percentage points, including a sharp drop in April back to the late-2013 lows. The extent of the decline has surprised many economists, ourselves included. What accounts for it, and will it continue?
The second question is more difficult, but we believe the answer is no. The most important reason is that the big increase in retirements in the last three years looks far less “structural” to us than generally believed. Many people seem to have pulled forward their retirement because of the weak job market. This leaves correspondingly fewer retirements for future years, and it means that the impact of retirements on participation is likely to become much less negative.
The other drags on participation are also likely to abate or reverse. Inflows into disability insurance are now slowing sharply, consistent with past cyclical patterns. The school enrollment surge has started to reverse as young workers are finding better job opportunities. And stronger labour demand is likely to pull many discouraged workers back into the job market.
Jan Hatzius’ call that the decline in Labour Force Participation Rate will not continue (and will reverse) is consistent with a broader position of his which is that there’s not going to be much pressure on the Fed to tighten, as slack remains in the job market, keeping wage pressure down.
For investors, who would like to see the easy money last as long as possible, this could mean the “goldilocks” period has a long way to go.
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