We May Finally Be On The Verge Of A Seismic Shift In The Labor Market That Everyone Has Been Waiting For

Much has been made of the multi-year slide in the labor force participation rate since the financial crisis of 2008.

The drop has been driven in part by the rise in unemployed workers who have become discouraged over dismal job prospects and thus given up looking for work, leaving the labor force altogether.

In the last few months, however, the labor force participation rate has actually stabilized. It bottomed out in October at 62.8%, and by March, it had risen to 63.2%.

The recent rise in labor force participation has been accompanied by a sharp drop in the number of discouraged workers not in the labor force, as chart 1 illustrates.

Labor force flows compiled by the U.S. Bureau of Labor Statistics provide some insight into what is happening. Each month, with in the official jobs report, the BLS maps the number of workers moving between three states: employed, unemployed, and not in the labor force.

Chart 2 shows the number of people who remained outside the labor force in a given month. The number of people outside the labor force who have stayed outside the labor force has been going nowhere but up for years, but in the last few months, this trend has actually begun to reverse.

Where are those people going?

It appears as if some of them are re-entering the labor force as unemployed workers, as chart 3 illustrates.

However, the much bigger story appears to be those re-entering the labor force to take jobs, as chart 4 shows.

According to Sam Coffin, an economist at UBS, there are a couple of things going on here.

First is the expiration of emergency unemployment compensation benefits at the turn of the new year, which may be forcing more people to look for work.

Another, much more potent force may finally be playing out in the labor market, though - one economists have been waiting to see for a long time: workers may finally be returning to the job market because the economy is improving and confidence in job prospects is coming back.

The unemployment rate was unchanged at 6.7% in March, defying Wall Street's consensus forecast for a tick down to 6.6%. However, many economists characterized the rate as staying elevated for "good reasons."

In other words, the unemployment rate remained elevated not because job gains weren't solid - at 192,000, the magnitude of the increase in payrolls was on the order of those that have dragged the unemployment rate down significantly over the past year - but because labor force participation rose.

"Payrolls have now returned to their pre-winter trend of just under 200,000 per month, more than enough to keep the unemployment rate trending down, unless the labor force begins to expand more rapidly," says Ian Shepherdson, chief economist at Pantheon Macroeconomics.

"The data for Q1 appear to show exactly that, with the labor force rising by a total of 1.3 million, compared to a decline of 0.5 million in 2013 as a whole, but these data are hugely volatile and a three-month increase - even a big one - is not definitive evidence of anything."

Economists and market participants will undoubtedly be watching this trend closely in the coming months, as it may have implications for Federal Reserve monetary policy.

"If you are a dove on the FOMC, you can point to the rise in participation, steady unemployment rate and flat growth in earnings as a way to reiterate the idea that rate hikes remain in the distance," says Neil Dutta, head of U.S. economics at Renaissance Macro.

What happens next, no one can say for sure - but recent data suggest the labor market may be on the verge of seismic shifts in 2014.