A paper by Federal Reserve staff that will be discussed at the Brookings Institution on Friday possibly hints at the central bank's thinking on interest rates and employment in advance of a consequential Fed meeting next week. The findings support hawks on the Federal Open Market Committee, who feel that the Fed needs to prepare to raise rates sooner than expected, although the results are still being debated and might not persuade the committee's more dovish members.
The paper discusses the number of people who consider themselves part of the workforce -- including both people who have a job and those who are looking for work. It is a measure of the total manpower available in the U.S. economy. This number, the labor force participation rate, has been decreasing steadily since 2000. Americans who can't find work have been leaving the workforce, as have more and more retirees as the population ages.
The question now is whether there is anything that the Fed can do to slow the decline. In theory, interest rates near zero, as they have been since the financial crisis, should lead to rising prices and wages and more openings. In turn, people who are thinking of retiring might continue working, while others who retired early or just gave up on working might be coaxed back into the rat race.
That might not work, suggest the authors of the paper, who include William Wascher, a senior member of the bank's economic staff. They argue that the number of people who aren't working but would be if economic conditions were better is relatively small. In other words, America's missing workers aren't coming back. America's labor force has shrunk, the researchers find, largely because of an aging workforce and other, larger trends, not just because of a bad job market.
The authors warn policymakers that "they should not expect the participation rate to show a substantial increase from current levels as labor market conditions continue to improve."
Yet deciphering the fluctuations in the labor force participation rate is a task fraught with uncertainty. Economists are looking closely at this figure mainly because the financial crisis was so severe that Yellen and others worry it scrambled the unemployment rate, the central bank's traditional measure of the strength of the labor market. While the unemployment rate of 6.1 percent is now approaching normal levels, that figure only includes people who are actively looking for work, and the number of people who are working part time is still very high.
Most economists agree that an aging population accounts for about half of the decline in labor force participation since the crisis. The rest is a mystery. Even before the recession and among people in their working years, between the ages of 25 and 54, fewer men were employed and the number of working women had plateaued. One possible explanation the authors consider in the paper is an increasingly automated, global economy with fewer and fewer jobs in the middle of the income distribution. An education has become necessary for a job that pays well, and competition for jobs that require little skill has become so intense that real wages are falling. Perhaps the economy just no longer has work for some people.
Hard evidence for this hypothesis is hard to come by, however.
Then there is the group who is the main concern of the Fed right now: those who might be willing to go back to work. Their numbers are still open to debate. In a note to investors, David Mericle and Sven Jari Stehn of Goldman Sachs took a look at the staff's paper and argued that the authors had been too pessimistic in their reading of the data.
It's also worth noting that even if maintaining interest rates near zero doesn't bring more workers into the economy, there are still reasons why it might be a good idea. Rising wages and prices would allow the Fed to raise interest rates to a higher level before the next recession, which would give the central bank more flexibility to react. Other recent research suggests that wages could rise while prices remained low, which would be a good deal for the working class.
That said, Yellen and her colleagues at the Fed have indicated that they have little interest in these theories, which means that they are likely to pay careful attention to what their staff has to say about participation in the labor force.
At their meeting next week, members of the open market committee will take another look at language in its most recent statement suggesting that an increase in rates is still a "considerable time" off, or that there are a "significant" number of people who would rejoin the workforce or work more hours if conditions improve.
Some members, including James Bullard, the president of the St. Louis Federal Reserve, indicated discomfort with this vague language. They feel that the central bank needs to give market participants plenty of warning before raising rates and thus tightening credit throughout the economy. If the members of the committee can't resolve their differences, a change in the wording might have to wait.
Market participants will also be listening closely to Yellen's press conference following the meeting to see if she answers any of the questions about the labor market she posed in her speech at the annual central banking conference in Jackson Hole, Wyo. last month.