- Justin Sullivan/Getty Images
A low unemployment rate and middle-of-the-road increase in employment in Friday’s jobs report for September seems to lend support to that argument.
But another statistic reported Friday, the labor-force participation rate, offers a clue that there’s still slack in the job market.
That statistic measures the percentage of people over the age of 16 who have a job or are actively seeking one. It has started to tick higher lately after years of declines, showing that people are getting back into the job market.
In the latest reading, the labor-force participation rate increased by one-tenth of a percentage point from the previous month’s. That may not seem like a lot, but it happened amid a 1.9% increase in the labor pool since September 2015, the largest annual percentage jump since January 2007.
This is good news for the US economy, no matter how you slice it. But interpretations of this data could affect policy decisions – namely how aggressively the Federal Reserve raises interest rates.
Neil Dutta at Renaissance Macro said the labor-force numbers were particularly encouraging.
“The labor force participation rate climbed 0.1 ppt to 62.9%, the highest since March,” Dutta wrote in a note to clients after the report’s release. “Over the last year, the civilian labor force has climbed by nearly 2%, a very strong pace. Importantly, the prime-age participation rate (25 to 54 years) surged 0.2pp to 81.5%, the highest in nearly three years.”
The labor-force participation rate is still lower than the long-term average, but much of this is due to an increase in the number of baby boomers retiring. Outside this long-term trend, recent moves in the labor force for young people returning to the workforce offer an interesting look into the strength of the labor market.
The participation rate of prime-age workers, or those ages 25 to 54, increased by 1% over the past year, as Josh Zuburn at The Wall Street Journal noted, the biggest year-over-year increase in at least 30 years.
But as Bill McBride of the Calculated Risk blog pointed out, the participation rate of 25- to 29-year-olds in particular has increased by 2.5% year-over-year, compared with a 2% drop by 50- to 54-year-olds.
The data doesn’t give any insight into why the increase among younger workers is occurring, but it could be a combination of young people graduating from college or grad school or those who were not able to find work getting a job. Even people without a high-school degree have seen their job prospects improve, despite an uptick in that group’s unemployment rate in the past month.
The prime-age increase may be the most significant, as even President Obama has worried about the increase of young people not in the labor force.
This is of particular importance to the Fed given that full employment is one of its two stated mandates. To Torsten Sløk, the chief global economist at Deutsche Bank, the September report indicated that the Fed has met its goal.
“For the first time in almost 20 years, we are now seeing a decline in the number of people outside the labor market. As the first chart shows, this is consistent with what we saw in the mid-1990s and 2006, when we also were at full employment,” Sløk said in a note to clients after the report.
- Deutsche Bank
On the other side, however, one could argue that the fact young people are entering the labor force at the fastest rate in years shows there are discouraged workers who still do want jobs but are outside the labor force, thus labor market slack. So, to encourage more hiring by firms that would draw those people back into the labor force, the Fed should keep interest rates on hold.
Essentially, you could interpret the jump two ways depending on how optimistic you are.
A. The labor-force jump shows there is a hidden pool of discouraged workers who still need to be pulled into the labor force through low interest rates.
B. The labor-force increase shows that businesses have run out of easily available workers to hire and now are having to pull on discouraged workers to reenter the job market to find employees.
Wage-growth data probably offers further support to option B, as it is at a post-recession high and is even better for nonmanagement workers and low-wage groups like construction workers, as Dutta noted. An increase in wages suggests that the pool of workers is smaller and forcing businesses to raise pay to attract workers.