The March jobs report extended the most remarkable trend in the US labour market right now.
The labour force participation rate, which measures the proportion of people working or looking for a job, rose for a sixth straight month, to 63%.
The rest of the jobs report was strong. It showed that the economy added 215,000 jobs — more than expected. The unemployment rate rose from a post-recession low of 4.9% to 5%, but that was because of people joining the labour force.
“The participation rate was the showstopper in this report,” wrote JP Morgan economist Michael Feroli in a note Friday.
But in the last four months, the labour force grew by 1.92 million, the fastest pace in 16 years according to the New York Times.
Prime-age workers — between the ages of 23 and 34 — have been re-entering the market and driving the participation rate higher in recent months, according to Bank of America Merrill Lynch economists.
“Very simply it’s just an indication of a vote of confidence in the labour market recovery from previously displaced workers,” Millan Mulraine, deputy chief US macro strategist at TD Securities, told Business Insider.
The participation rate fell to a 38-year low of 62.4% in September, and so it’s still historically weak.
Demographic shifts have helped to keep it low.
Most importantly, it’s the retirement of baby boomers, or people born after the mid 1940s, who are ageing and entering their retirement years, and young people studying for longer, according to Deutsche Bank chief US economist Joseph LaVorgna.
And so, the big question is whether demographic forces will continue to act as a drag, offsetting participation gains enabled by the economy’s attractiveness.
A near-record number of job openings has pulled in people who were on the fence about working, according to Glassdoor chief economist Andrew Chamberlain.
“But that is a drop in the ocean of the larger trends that are affecting labour force participation,” he told Business Insider.
The participation rate had been falling in the years before the great recession. And so it follows that it is not driven just by the economic cycle, Chamberlain said.
“Half of the decline since the recession was due to demographics and another half was due to disenchanted workers,” Mulraine said. “So if those disenchanted workers move into labour force, then you’re likely to see that overcompensate for the decline that we’ll have in demographics.”
Rising participation is great for the Federal Reserve right now. The labour market is great enough to pull workers in, but wages are still relatively flat. This means it can continue to move slowly, if inflation is not out of control.
Fed chair Janet Yellen “wagered that participation would pick up in a high pressure labour market, and so far she’s looking pretty smart,” Feroli wrote. “The risk of that wager is overheating labour cost pressures, but that doesn’t appear to be occurring just yet.”
But the half-and-half situation that Mulraine described could easily tilt towards demographics in the long run.
LaVorgna wrote in a note last week that demographics alone have shaved off two percentage points from participation since 2007.
“Over the longer run it’s the demographics that actually matter,” PNC deputy chief economist Gus Faucher told Business Insider.
“We have the baby boomers retiring, we have smaller cohorts behind them in the population coming into the labour force. So we do expect the labour force participation rate will decline over the longer run,” he said.