By Nick Timiraos and Sarah Chaney
The U.S. labor-force participation rate has defied predictions
of demographic-driven declines thanks to a strong economy that is
pulling in and retaining more workers.
The rate's trajectory from here will have big implications for a
range of issues, including how fast the economy can grow, how much
inflation it generates in the process and whether the Federal
Reserve will continue to feel comfortable keeping interest rates so
low.
Since bottoming out in September 2015, the share of the
population aged 16 and over working or looking for work has
stabilized around 63%, cutting against an extended decline tracing
back to 2001. Many economists had been predicting continued
declines in the rate.
In just the past six months, the number of people outside the
labor force has fallen by 1 million, the largest such decline on
record.
"The performance of labor-force participation over the last
three or four years has been an upside surprise that most people
didn't see coming," said Fed Chairman Jerome Powell at a news
conference this week.
A multitude of job openings and steadily rising wages are
drawing more workers in their prime working years, 25 to 54 years
old, off the sidelines. Meanwhile, effects from an aging
population, which economists had expected would tug down the
participation rate, have been partially offset by rising
participation among older workers, even those of retirement
age.
With more people in the workforce than expected, the economy
might be able to grow faster without pushing up inflation in a way
that would warrant interest rate increases by the Fed.
"It would suggest there's less inflationary pressure associated
with the unemployment rate being as low as it is," said former Fed
Chairwoman Janet Yellen in an interview.
The prospect for this supply-side boost was always at the back
of her mind when she ran the Fed from 2014 to 2018 and moved
interest rates up only gradually even as unemployment fell. The
shift in participation has been even more dramatic than she had
anticipated, she said.
Most of the improvement comes from 25 to 54-year-olds. Among
prime-age workers, participation has risen by around 0.6 percentage
point for men and 1.5 points for women since 2014. Most of the
increases have stemmed from higher participation rates by workers
who reported that they had a disability or were discouraged,
meaning they wanted to work but stopped actively seeking
employment, according to an analysis by Ernie Tedeschi, an
economist at Evercore ISI.
How much scope remains for these gains to continue? The
prime-age participation rate in February stood nearly 1 percentage
point below the high level reached during the 2001-07 expansion and
two points below the all-time peak in 1999. That suggests there is
room for it to run higher.
Still, many labor-market specialists say that even if the
economy continues to run at a solid pace, the strength of the labor
market likely won't prove enough to offset the powerful downward
drag from the aging population in the coming years.
Americans over the age of 65 work at much lower rates than their
younger counterparts, meaning that as they increase as a share of
the population, the labor-force participation rate will likely
decline. Just about 20% of Americans over 65 work or look for work.
Even if that share rises, it is still a long way from participation
rates for younger people.
"Eventually the boomers are really going to start retiring, and
there are a lot of them," said Stephanie Aaronson, a former Fed
economist who is now at the Brookings Institution in Washington,
D.C.
Demographic trends should shave another 2.5 percentage points
off participation rates over the next decade, according to
researchers at the San Francisco Fed. Fewer workers could weigh on
growth and make it harder to expand the economy without causing
pressure on wages and inflation.
Mr. Powell spent two days of congressional testimony last month
gently urging lawmakers that despite recent improvements, broader
policy changes outside of the central bank's remit -- to education,
training and the social-safety net -- are needed to sustain recent
improvements through good times and bad.
The White House Council of Economic Advisers also focused on the
need to expand participation in its annual Economic Report of the
President released this week. It mentioned the potential benefits
of deregulation.
While recent increases in workforce participation are
gratifying, Mr. Powell said they still leave the U.S. lagging far
behind other well-off countries. Improving this is "going to need
more than a good labor market," he said.
The U.S. has one of the lowest rates of growth in female
labor-force participation since 2000, among the 36 countries in the
Organization for Economic Cooperation and Development.
For women 21 to 40 years old, participation stopped rising over
the last two decades after climbing for the previous half-century.
Economists have said this could highlight the need for more
flexible workplace policies around child care.
Even if officials conclude the labor market has further room for
recovery, they don't know how long it will be before the next
recession hits.
"And when -- not if -- it hits, the same labor-market weakness
around disability, child care, part-time work, etc., could all
arise again without policy changes to address them," said Mr.
Tedeschi.
Write to Nick Timiraos at nick.timiraos@wsj.com and Sarah Chaney
at sarah.chaney@wsj.com
(END) Dow Jones Newswires
March 23, 2019 07:14 ET (11:14 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.