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Declining Labor Force: Participation More Structural Than Cyclical

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Labor force participation is still low

The labor force participation rate is the ratio of the labor force against the demographic cohort. In other words, it’s similar to the employment-to-population ratio the Fed uses, but it takes demographics into account.

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Drop in the labor force participation rate is more structural than cyclical

In the United States (VOO) (IVV), we’ve seen the labor force participation rate increase progressively from the early 1960s through the early 2000s. To a large extent, this increase was attributable to more women participating in the labor force. After the financial crisis, however, the labor force participation rate declined to levels we haven’t seen since the late 1970s. At 62.7%, it still remains far from its pre-crisis levels of around 66%. We’re now seeing the gains from more women participating in the workforce being washed away.

Demographic forces have come into play

As demographic forces come into play, we’re seeing the participation rate staying at lower levels due more to structural factors than cyclical ones. The Baby Boomer generation is now retiring, and the Millennials are having trouble replacing them. The United States is currently facing a shortage of skilled labor, which is further exerting downward pressure on the participation rate while adding to the proportion of discouraged workers.

Wage growth in the United States (VTI) (IWD) (IWF) remains dismal, and the participation rate is struggling to pick up. We’ve seen how the headline unemployment rate is an insufficient measure of the health of the US labor market. There’s also the crucial role played by a labor market slack, which often goes unnoticed.

Next, we’ll dig into the evolution of this labor market slack to examine its role in the US employment gap. We’ll also help you understand the market implications of this slack for the US economy over time.

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