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The direction of the labor force participation rate in the next few months and the next few years will provide important insight into the near- and longer-term potential growth rate of the economy.

For several weeks, we have been writing about trends in the labor market and the importance of monitoring the labor force participation rate.  The labor force participation rate has not changed in the last year and is well below the January 2020 level (61.7% vs. 63.4%). 

Source: FRED.

The expectation of most economists is that the labor force participation rate will start to increase in Q4 2021 as the federal unemployment benefits expire and many of the consumer relief programs like eviction moratoriums end.  If the labor force participation rate does not increase, this will likely have a negative impact on economic growth in the near-term as consumer incomes would decline if they do not replace lost unemployment benefits with wage income.        

The trajectory of the labor force participation rate also has implications for long-term economic growth.  The labor force participation rate has been making lower highs each cycle since 2000, which is one of the factors that contributed to lower economic growth during that period. 

Source: FRED.

Some of this could be demographic or a skill mismatch, but the underlying data shows lower participation rates among younger cohorts and all education levels. 

The labor force participation rate has declined since 2000 for both genders (male 67.7% from 75.3%, female 56.2% from 60.3%). 

Source: FRED.

Labor force participation for the 25–54-year-old cohort (considered the prime working ages) has declined from 84.4% to 81.8%.  The participation rate has declined for men (88.3% from 92.2%) and women (75.5% from 77.3%).

Source: FRED.

The largest percentage change in labor force participation has taken place in the youngest cohort, 16–19-year-olds.  Their participation rate peaked at 52.9% and is currently at 36.7% (higher than January 2020).  This could be a combination of factors, including students prioritizing other activities over employment as well as older workers taking positions that used to be filled be younger workers.    

Source: FRED.

Another noticeable change in the labor force has been the increase in participation from workers over the age of 55.  Their participation rate rose from 32% in 2000 to 40.3% in January 2020 and is currently at 38.5%.  The participation rate for workers over 65 rose from 21.6% in 2008 to 26% in February 2020 and has since declined to 23.2%.  Labor force participation rates for these groups suggests that the decline in the overall participation rate has not been driven by demographics. 

Source: FRED.

Going forward, participation rates for this demographic will likely slow as workers retire, which will weigh on the overall participation rate (if other age cohorts do not increase).  If participation rates continue to accelerate for this cohort, it could be a sign that those workers are unable to retire (which is another symptom of slower growth).

On the skills side, the labor force participation rate for workers 25+ without a college degree has been declining for decades and has fallen from 65% in 2000 to 55% today.  At the same time, the participation rate for workers 25+ with a college degree has also steadily declined from 80% to 72% today.

Source: FRED.

These numbers indicate that while the decline has been worse for workers without a degree, there has been a decline for all workers.  This suggests that the deterioration in the overall labor force participation rate is not purely a skills mismatch. 

If the labor force participation rate makes another lower high this cycle, it will likely mean economic growth on a go forward basis will be even lower than the decelerating trend that has been in place for the last 20 years. 

 



 

The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance.  The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.

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