Is Labor Force Participation Down for Good? NewsWire

NewsWire: 7/7/21

• Before raising interest rates, the Fed requires a return to maximum employment, but it’s unclear just what that maximum now is. If labor force participation has been driven permanently lower, a rate increase might be coming sooner than expected. (The Wall Street Journal)
• NH: One of the Fed’s key conditions for raising interest rates is a return to maximum employment. Officials say we’re not there yet. We’re still down about 7 million jobs compared to February 2020, before the pandemic hit.
• Economists say that we're on the right track. They're focused on the unemployment rate, which has declined in recent months and now stands at 5.9%. That's a good sign.

• But maybe they should care more about labor force participation, which remains flat. Falling unemployment doesn't mean much if the labor force participation rate refuses to budge. LFP is currently 61.6%, which is where it has remained for basically the past year. Pre-pandemic, it was 63.3%. Since the U.S. labor force is around 165 million, a -2% drop--if permanent--means that around 3.3 million workers are not coming back.

• That's the big question. Is this shift permanent?
• Could some of this drop be explained by early retirements? According to estimates from the Dallas Fed, 2.6 million people have retired since February 2020. A little over half (1.5 million) of this group would not have otherwise been expected to retire. Last year, I cited estimates from Pew showing that there were around 1.1 million “extra” retirees thanks to the pandemic. (See “Pandemic Forcing Boomers Into Retirement.”) Typically, Boomers' LFP has risen during economic recoveries, but this time it could be ratcheting down. Given these numbers, we can estimate that roughly half of the LFP drop could be due to retirements.
• What accounts for the rest of the drop? Surveys have shown that many would-be workers are staying on the sidelines due to concern about Covid-19, childcare disruptions, and expanded government benefits. Unlike retirees, who are very unlikely to return to the labor force, these people might return as vaccination rates continue rising and more states roll back benefits.
• But it's not looking good. Arguably, the U.S. has already made significant progress on vaccinations, and over the past few months, Americans have consistently reported feeling more and more comfortable returning to activities like traveling and shopping. But through it all, LFP has remained flat.
• Expanded benefits have just begun ebbing. In mid-June, a handful of states ended their participation in pandemic-era unemployment programs, with additional states pulling out in subsequent weeks. In total, 25 states have withdrawn or plan to withdraw from these programs from June 12 to July 10. That's too recent for any effect to be reflected in the latest state numbers on labor force participation, which are typically released a month later than the nationwide numbers.
• The latest nationwide numbers, which were released on July 2, did incorporate LFP data from some of the earliest-withdrawing states. But these states were all relatively small (examples: Missouri, Iowa, and Mississippi), so they wouldn't impact national LFP much either way.
• We have to wait for the next BLS release, coming in early August, to show us whether there's hope for LFP. That one will include data from a couple of big states: Texas and Florida. At that time, we'll also be able to look in detail at what has happened to LFP in the individual states that were the first to end benefits, which could offer a preview of how these numbers will change across more states in the coming months. Stay tuned.