Wednesday, June 18, 2014

Recent declines in labor force participation are not driven by discouraged workers

The Federal Reserve officials continue to debate the level of slack in US labor markets. And a large number of economists, analysts, and investors believe that there are so many discouraged workers sitting on the sidelines, companies have a nearly unlimited pool to draw from - even as hiring improves (see chart). After all, just look at the labor participation rate.

But there is more to the story here. JPMorgan's economists decomposed this decline in participation rate since the start of the Great Recession. Here are the key drivers.

Source: JPMorgan
It will be hard for companies to draw from the "disabled" or the "retired" groups, leaving "other" as the source of additional labor (on top of those who are "officially" unemployed currently). That "other" pool has actually not increased over the past 3-4 years in spite of the declining participation rate.

Furthermore, the "other" pool can be broken down into three categories as well. The "discouraged" workers are therefore not currently the driver of this declining labor force participation. In fact that group shrank in 2013.

Source: JPMorgan

JPMorgan: - Fujita’s analysis shows that the initial leg down in the LFPR [Labor Force Participation Rate] was due primarily to a sharp rise in discouraged workers and school enrollments (from the "other" category). These categories since have stabilized. The decline in the LFPR from these categories subsequently was reinforced by a trend rise in disability, although this factor, too, now may be leveling off. More recently, an acceleration in retirement has been pushing down the LFPR.
This tells us that the pool of available "discouraged" workers and therefore slack in the US labor markets is not as large as some believe. More importantly, the "discouraged" group is not growing - even as the labor force participation rate continues to fall.

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