Labor Force Participation – A Critical Issue for the Fed

Written by Richard Hokenson 

The “preliminary” estimate of an increase of “only” 134,000 September payroll jobs in combination with the unemployment rate reaching a 40 year low of 3.7% prompted many commentators to state that labor market slack had evaporated because companies were finding it increasingly difficult to find workers. We emphasized “preliminary” because payroll employment will be revised in the months ahead. Be that as it may, our opinion is that it is erroneous to conclude that there is no or very little labor market slack even if the revised data still show a slower pace of job growth. It is much more important to focus on labor force participation.

The most relevant labor force participation rate to monitor is the rate for prime-age workers, i.e. persons between the ages of 25 and 54. It troughed in late 2015 and has been trending irregularly higher since then (see Chart 1). Higher participation for women comprises much of the gain in the total as the increase in participation by men is much more modest (see Charts 2 and 3). That all three measures of participation have yet to reach or breach prior peaks is symptomatic of labor market slack.

In assessing the areas where there might be more or less slack, we turn our attention to the three main prime-age subsectors: persons aged 25-34 (Charts 4 to 6), persons aged 35-44 (Charts 7 to 9) and persons aged 45-54 (Charts 10 to 12) . The most important observations from this decomposition are:

  • The increase in the participation rate for persons aged 25-34 is dominated by women. Their participation rate has reached prior peaks which means that there is not much room for further expansion. There is, however, considerable potential for men aged 25-34.
  • The participation rate for both men and women aged 35-44 has not yet exhibited much of an expansion in this recovery. This also indicates a great deal of potential.
  • For persons aged 45-54, the participation rate has improved for both men as well as women. There is still some room for further improvement.

The next critical labor market reports are the Employment Cost Index (ECI) for the third quarter (to be reported October 31) and Average Hourly Earnings (AHE) for October (to be reported November 2). We expect the ECI to confirm moderate wage growth. The outcome for AHE could be very dramatic. As we expected, the monthly increase in September AHE was less than September of last year which meant an easing of wage inflation from 2.9% in August to 2.8% in September. As we have discussed previously, AHE declined in October of last year. Thus, any increase this year will appear to be a significant acceleration in wages. We hope that the Fed can see through that and focus on labor force participation.



This update was researched and written by Richard Hokenson, as of October 19 2018