Considerable research has found that something like half of that three-percentage-point labor force exodus is perhaps “benign,” in the sense that it reflects the retirement of aging boomers, though even there, mark me down as “not so sure.” After all, aging workers were decidedly increasing the length of their working lives before the downturn hit, so I strongly suspect some interaction between the labor-demand-zapping downturn and demographics. But either way, it’s widely agreed upon that a good chunk of the decline — maybe half — is due to weak labor demand.
It thus follows that a tightening job market should arrest part of that decline. And that suggestion can be eyeballed in the above figure. In fact, the LFPR has wiggled within a pretty narrow band betwixt 62.8 percent and 63.2 percent since last August.
It could be a head-fake, for sure — Buddha knows we’ve seen that before in this recovery. But I don’t think so, in part because this is consistent with the now solid evidence of a tightening job market (though, as I stressed earlier, there’s still too much slack, as can be seen in the wage results). If this flattening trend sticks, it’s evidence of “reverse hysteresis”— the idea that an improving job market can pull people back in.
That’s important on both the micro and macro levels. First, since most working families depend on their paychecks — not their stock portfolios — it implies potential increases in living standards.
Second, labor supply is a key input into longer-term GDP growth, and one reason growth economists have marked down their estimates of potential growth is the negative trend in the LFPR. If it has truly stabilized, and more so if it should increase — a development I think is possible — it implies that some of the structural damage to the potential growth rate will be reversed.
Simply put — and because who can resist a econo-sports analogy — we’ll put more growth points on the scoreboard because more people have come in from the sidelines to contribute to the game.
(Source: BLS, via FRED)