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The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.


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October 19, 2015


Should We Be Concerned about Declines in Labor Force Growth?

For the second month in a row, the October jobs report from the U.S. Bureau of Labor Statistics (BLS) has revealed a decline in the labor force. From August to September, the labor force lost a seasonally adjusted 350,000 participants. And the August number of participants was a seasonally adjusted 41,000 below July's level. Although two months don't necessarily make a trend, observers have noticed the declines in the labor force (here and here, for example), and they deserve some attention.

Economists might be concerned about these labor force declines for two reasons. First, these losses might indicate that the current unemployment rate doesn't accurately reflect a strong labor market. Second, our economy needs labor to make things, perform services, and continue to grow. Let's take a look at the evidence supporting these two concerns.

Concerns about a shadow weak labor market
Two pieces of evidence suggest that the declines in the labor force don't indicate a weak labor market: employment growth and the reasons people cite for being out of the labor force. Employment growth is robust. According to the Atlanta Fed's Jobs Calculator, the labor market needs to create an average of only 112,000 jobs per month to maintain its relatively low unemployment rate of 5.1 percent. During 2015, the economy has created, on average, 198,000 jobs per month.

But we might be concerned if the workers leaving the labor market were entering into the no-man's land of the marginally attached, a term describing those who want a job, are available to work, have looked for work in the previous year, but recently have stopped looking. Some of these people have stopped looking explicitly because they think jobs prospects are poor (called "discouraged workers"). Others have stopped looking for other reasons such as attending school or taking care of family members. If these categories of nonparticipants were absorbing a large share of those leaving the labor force, we could be concerned that they would, at any moment, reenter the labor market and push that unemployment rate right back up again. The chart below tells us that this possibility is unlikely.

The chart decomposes the year-over-year changes in the total number of labor force participants into changes in the population and the negative changes among reasons given for nonparticipation in the labor force. (I use year-over-year changes because the reasons given for not being in the labor force are not seasonally adjusted.) Year-over-year changes in the population have been consistent in their contributions to changes in the labor force, propping it up. The growth in the contribution of those not wanting a job (pulling down labor force growth) has been fairly striking.

The share of people giving other reasons for not being in the labor force (discouraged, not available, etc.)—in addition to making relatively small contributions to changes to the labor force—has mostly been shrinking since April, meaning that they cannot explain the recent slowing of labor force growth. In other words, only a very small part of the growth in nonparticipants has come from those marginal workers who are most likely to reenter the labor force. So the first fear—that this declining labor force growth is producing a false sense of security in a relatively strong labor market—appears unfounded.

Threats to economic growth
Labor is an important component in the production process. Short of dramatic technological advancements, both the manufacturing and service sectors need a consistent source of labor to fuel output. Even though the economy appears to be on the right track with respect to job creation, ongoing declines in labor force growth could pose a challenge to economic growth. Additionally, as employers compete for fewer workers, we would expect wages to be bid up. Keep an eye on the Atlanta Fed's wage tracker to see how slowing labor force growth plays out in wages.


October 19, 2015 in Employment , Labor Markets | Permalink

Comments

Julie,
I thought you did a great job with this article. It was clear and readable.

If US labor participation rates are heavily influenced by the departure of baby boomers, won't this same problem be repeated in other countries? Should we expect lower rates of global economic growth in the future?

By the way, the Atlanta Fed does a super job with this site. You definitely have the most interesting research projects.

Posted by: Steve Grunig | October 19, 2015 at 04:12 PM

These results accord with our own analysis of the data and are neatly explained in a way that doesn't require a PhD in math to understand. A third factor that adds to the case that lower labor force participation does not represent hidden slack is the high level of job openings reported by the BLS (admittedly they pulled back in August from a record-high level in July but they remain very high). Labor force participation continues to decline as the number of job openings has risen, which further questions the idea put forward by some that falling participation has a significant cyclical component. We are becoming increasingly concerned about the economy's capacity to meet increased demand due to tightness in the labor market (and disappointing productivity trends).

Posted by: John Ryding | October 20, 2015 at 08:30 AM

Julie This would be more helpful if the labor force was only those 18-65. What is unemployment for this group after deducting those attending college?

Posted by: duke thomas | October 23, 2015 at 02:54 PM

Julie Hotchkiss replies: Thank you for the comments--it's always nice to know folks are reading macroblog! Let me offer some additional information about a couple questions you raised.

Global LFPR: Steve asked about global labor force participation rates. The same mechanisms that link labor force participation and economic growth in the U.S. would be at work in other developed economies. A great place where you can see what's been on going around the world with labor force participation rates (LFPR) can be found on the World Bank website http://data.worldbank.org/indicator/SL.TLF.CACT.ZS/countries/1W-US-XC-XS-XM?display=graph.

The graph shows by default the global LFPR. You can add LFPR to the chart for different countries, geographic areas, and countries grouped by income level. (In the box below the chart, simply type what you're interested in--for example, "United States" or "Europe" or "High Income" or "Japan.") If you do this, you'll see that the LFPR in the United States is falling faster than global LFPR, LFPR in the euro area has been flat or seen a slight rise, LFPR is lower among high-income countries and falling, and LFPR has been flat in low-income countries.

Trends among those 25-54: Duke mentioned that it would be illuminating to see what's going on with the participation rates and reasons for nonparticipation among working-age adults. I agree. The typical age range to consider questions related to working age adults is 25-54 (after college but before retirement). The U.S. Bureau of Labor Statistics reports reasons for nonparticipation for the full labor force and a couple of age groups on its website http://www.bls.gov/web/empsit/cpseea38.htm.

You'll see that the total number of nonparticipants among 25-54 year olds increased from October 2014 to October 2015 by 287,000 people. The 468,000 increase in people during this period who do not want a job more than accounts for the total increase in nonparticipants in this age group. (The number of nonparticipants wanting a job declined, making up the difference.) This number of nonparticipants among 25-54 year olds who do not want a job, in fact, is a greater share of rising total nonparticipants in that age group (163 percent) than you see among those 55 years of age and older (104 percent).

If you're interested in looking at trends in nonparticipation over time by age group, check out the Atlanta Fed's Labor Force Dynamics web page https://www.frbatlanta.org/chcs/LaborForceParticipation.aspx. And thanks again for reading!

Posted by: webmaster | November 19, 2015 at 07:35 AM

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