In the wake of Friday’s NFP results, a Goldman Sachs research note asks on the US labor force participation rate decline: What accounts for it, and will it continue? It then notes implications for US interest rates going forward.
Since the start of the Great Recession in late 2007, the labor force participation rate has fallen by more than three percentage points, including a sharp drop in April back to the late-2013 lows. The extent of the decline has surprised many economists, ourselves included.
What accounts for it?
Using an approach similar to that of a recent Philadelphia Fed study, we can show that the decline reflects a combination of
1) more retirements,
2) more disability,
3) higher school enrollment, and
4) more discouraged workers
Will it continue?
- We believe the answer is no.
- Most important reason is that the big increase in retirements in the last three years looks far less “structural” to us than generally believed.
- Many people seem to have pulled forward their retirement because of the weak job market. This leaves correspondingly fewer retirements for future years, and it means that the impact of retirements on participation is likely to become much less negative.
- Other drags on participation are also likely to abate or reverse.
- Inflows into disability insurance are now slowing sharply, consistent with past cyclical patterns.
- The school enrollment surge has started to reverse as young workers are finding better job opportunities.
- And stronger labor demand is likely to pull many discouraged workers back into the job market:
Goldman’s then notes the implication for rates:
- If participation does stabilize or rise a bit, the decline in the unemployment rate should slow even if payroll growth stays at the sturdy levels seen in recent months.
- This is one key reason why we believe Fed rate hikes are still far off.