Many People Have The Labor Force Participation Rate Story All Wrong

Many are quick to attribute this falling rate due to workers leaving the labor force because they're so discouraged by the poor job market.

But this is only a small part of the story.

UBS's Drew Matus argues that this dropping participation rate is largely due to shifting American population dynamics. Specifically, we're running out of workers.

Matus is re-circulating a report he published in January.

... In 2012 the participation rate declined from 64.1 percent to 63.7 percent. This decline was the result of a decline in the prime working age (aged 25-54 years) population that was only partially offset by rising participation among older workers (aged 55 years and over). These movements are a continuation of labor force developments that have been underway since the financial crisis. Even if there is a moderate rebound in participation among prime working age workers, it seems possible that, given population trends, the labor force participation rate will remain close to 63.7 percent.

An increase in the number of discouraged workers is only a minor factor in the decline in the LFPR. In 2012 there were 909,000 discouraged workers, about 420,000 more than normal relative to the size of the population. Returning these “workers" back into the labor force would only boost the participation rate by 0.17pp, to 63.8 percent (the unemployment rate would increase by 0.25pp, to 8.1 percent).

"All else being equal, a lower participation rate lowers the 'break even' rate of employment growth — the number of new jobs that must be created to hold the unemployment rate constant," wrote Matus.

For more on today's jobs report, see here >