The la­bor force ex­pan­sion: Grow­ing, grow­ing, gone?

There’s been a spike in Amer­i­cans work­ing or seek­ing jobs “Es­sen­tially, we are at the peak” in the rate of par­tic­i­pa­tion

Bloomberg Businessweek (Europe) - - CONTENTS - −Peter Coy

Em­bold­ened by strong de­mand for work­ers, Amer­i­cans have flooded into the U.S. la­bor mar­ket over the past six months at the fastest pace since at least 1948. Most have found work, while oth­ers are still look­ing. Ei­ther way,

their pres­ence al­lows em­ploy­ers to hire more work­ers with­out hav­ing to get into a bid­ding war with com­peti­tors.

The rapid ex­pan­sion of the work­force has helped jus­tify the de­ci­sion of the Federal Re­serve un­der Chair Janet Yellen not to raise in­ter­est rates in March. With plenty of work­ers avail­able, com­pa­nies can ex­pand hir­ing with­out hav­ing to jack up wages, which could con­trib­ute to in­fla­tion. “Yellen’s la­bor mar­ket call is pan­ning out,” Michael Feroli, the chief U.S. econ­o­mist of JPMor­gan Chase, head­lined his anal­y­sis on April 1. “Yellen wa­gered that par­tic­i­pa­tion would pick up in a high pres­sure la­bor mar­ket,” he wrote, “and so far she’s look­ing pretty smart.”

Un­for­tu­nately, Feroli and many other econ­o­mists be­lieve the surge won’t last. They pre­dict that as more baby boomers re­tire, the share of the pop­u­la­tion that par­tic­i­pates in the la­bor force will re­sume the down­ward slide that be­gan in 2000. That will com­pli­cate the Fed’s job.

To grow with­out ex­ces­sive wage in­fla­tion, the U.S. econ­omy needs a big group of ac­tive work­ers as well as a smaller group of peo­ple who are avail­able and look­ing for jobs. Those two groups com­bined make up the la­bor force—which has never added more work­ers than it has over the past six months. (It of­fi­cially grew a bit faster from late 1999 to early 2000, but that was a sta­tis­ti­cal fluke re­lated to U.S. Cen­sus Bu­reau pop­u­la­tion es­ti­mate re­vi­sions.)

Econ­o­mists fo­cus on the la­bor force par­tic­i­pa­tion rate, the size of the la­bor force as a share of the en­tire civil­ian pop­u­la­tion age 16 and over that’s not in prison or other in­sti­tu­tions. It rose for 35 years as more women en­tered the work­force, peak­ing at 67.3 per­cent in 2000. It fell slowly un­til 2008, then rapidly dur­ing and af­ter the deep re­ces­sion, touch­ing bot­tom at 62.4 per­cent last Septem­ber. It’s now 63 per­cent.

JPMor­gan’s Feroli es­ti­mates that de­mo­graphic forces will con­tinue to push down the la­bor force par­tic­i­pa­tion rate by 0.25 per­cent­age points a year. A strength­en­ing econ­omy should help off­set the drag for a while, but that still leaves a pro­jected an­nual de­cline of 0.15 per­cent­age points in the la­bor force par­tic­i­pa­tion rate from here on. “Es­sen­tially,” Feroli wrote in an e-mail, “we are at the peak.”

David Mer­i­cle, a se­nior U.S. econ­o­mist at Gold­man Sachs, reached a sim­i­lar con­clu­sion in early March. He broke down the de­cline and re­cent re­bound in the par­tic­i­pa­tion rate into its var­i­ous com­po­nents, in­clud­ing re­tire­ment, dis­abil­ity, dis­cour­age­ment, and school en­roll­ment. Some dis­cour­aged work­ers on the side­lines could still come back to work, but oth­er­wise, he wrote, “We now view the cycli­cal par­tic­i­pa­tion gap as within 0.1-0.2 per­cent­age points of be­ing closed.”

The pes­simists could be sur­prised if more of the roughly 600,000 dis­cour­aged work­ers reen­ter the la­bor force. While their ranks have fallen from 1.3 mil­lion in 2010, they could drop fur­ther: There were fewer than 300,000 dis­cour­aged work­ers in 2000.

Another source of work­ers could be peo­ple work­ing from their kitchen ta­bles or dens. Says Mike Wach­holz, pres­i­dent of Pon­toon So­lu­tions, a hu­man re­sources out­sourc­ing firm in Jack­sonville, Fla., that’s a unit of Switzer­land’s Adecco: “More and more of our clients are get­ting com­fort­able with hav­ing work­ers who aren’t on site or even in the re­gion.”

The bot­tom line The record ex­pan­sion of the la­bor force is good news, but don’t ex­pect it to last. Baby boomers are still re­tir­ing in droves.

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