Back in 2013 I argued that the low Labor Force Participation Rate was not evidence of lots of labor market slack:
It’s true the payroll gains and falling unemployment rate overlook the low labor force participation. In my view the falling LFPR is not a cyclical issue, even though the variable is itself cyclical. This is very confusing to most people. Imagine a LFPR that has a strong downward trend for structural (non cyclical) reasons. Also assume the actual LFPR falls in a more cyclical pattern, falling steeply during recessions and leveling off during booms. The level periods look like “nothing happening,” whereas the LFPR is actually growing relative to the declining trend line. My prediction is that the LFPR will stay low even after we recover from the recession, and we always recover from recessions. It’s not a cyclical problem. This will become obvious by 2016.
Last October I explained the point further:
I noticed that the labor force participation ratio fell to 62.7%, the lowest rate since February 1978. Folks, it’s not coming back. In less than a year the recession will completely end and we will get a normal unemployment rate (about 5%). Jobs will be available and those people simply aren’t coming back. They are early boomer retirements (perhaps discouraged by the previous job market), disabled (perhaps partly discouraged by the job market in previous years) and young people staying in school longer, or choosing to work less (as is true in affluent towns like my own Newton, Massachusetts.) It pains me to say this but it’s pretty clear they aren’t coming back—the job market is good enough where the LFPR rate should not still be falling, if it really were nothing more than discouraged workers sitting there ready to plunge in again when things got a bit better.
Now it’s 2015 and the progressive mainstream media is finally beginning to contemplate the unthinkable. Here’s the (Keynesian) New Yorker:
Despite the subsequent economic recovery, which has now lasted for more than five years, the rate has continued to fall. Last month, it stood at just 62.7 per cent, a tie for the lowest level since 1978 (a time when more women stayed at home and did domestic labor rather than join the official workforce). . . .
Most policy-makers, including Janet Yellen, the chair of the Federal Reserve, have been assuming that much of the decline is cyclical and that, as the recovery picks up, more and more discouraged workers will return to the labor force. . . .
I agree with that argument: indeed, I’ve used it myself. By now, though, we should be seeing signs of the participation rate rebounding. The fact that it isn’t is somewhat alarming.
But not surprising to readers of TheMoneyIllusion.