One of the biggest problems with the job market isn't as bad as it looks

Despite the recent dynamite jobs report, there is still concern about the health of the labour market, as the number of adults in the workforce has been falling.

The labour force participation rate (LFPR), which measures the per cent of adults with a job or looking for one, has been on the decline since before the financial crisis. Even with recent gains, it remains well below its long-run average.

This drop off has even caught the eye of Republican Presidential Candidate Donald Trump, who cited the statistic in a speech Monday as a way of highlighting the weakness in the labour market.

The problem, according to Michelle Meyer at Bank of America Merrill Lynch, is that looking at the headline participation rate does not take into account the fact that Baby Boomers are hitting retirement age and other structural factors that are bringing it down.

“The labour force participation rate (LFPR) has been on a downward trajectory for over 15 years, falling to mid-1970 levels,” said Meyer, BAML’s chief US economist, in a note to clients.

“We estimate that about half of the decline is due to the ageing of the population. Another important factor was the rise in disabilities after the crisis. As such, examining the LFPR amongst 25-54 year olds is a better approximation of the underlying trend.”

Instead of looking at the trend for all adults, Meyer argued, a better strategy is to look at the trend among those that are in their prime working age. Based on this, the labour market looks a lot stronger than the headline would lead you to believe.

“Since last fall, the LFPR — particularly of the 25-54 year old cohort — has started to turn higher,” wrote Meyer.

The LFPR for those of prime working age has held up much better in the wake of the financial crisis, though there has been some decline. Meyer also notes that it increasing in recent months, showing that more people are coming back to the labour force.

So yes, the LFPR is much lower, but it probably isn’t as disastrous as it seems up front.

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