A Year From COVID: Labor Participation
The more famous labor market indicators, that is, the ones that everyone reads about, like nonfarm payrolls, the unemployment rate, and initial jobless claims, are all painting a rosy picture. Their optimism is corroborated by the JOLTS data series, but what do other, less popular, but no less important indicators say?
Let’s begin with the all important labor force participation rate, which unfortunately has barely improved over the last year.
From the chart, we can see that the unemployment rate has continued to fall after almost hitting 15% in April last year, reaching its current pandemic low of 5.8% in May ‘21. The labor force participation rate, on the other hand, after a quick recovery from its 60.2% low, also made in April ‘20, has barely budged since June of last year. The rate remains in a range between 61.4% and 61.7%, and has been stuck there for the past 12 months, even as the unemployment rate has made steady progress downwards month after month. What does this discrepancy mean?
Quite simply, that the bifurcation of the labor market, a phenomenon that began in the wake of the destruction wrought by the Great Financial Crisis 13 years ago, is still ongoing. The massive labor market disruption caused by the Covid lockdowns of the past 12 months have only made the situation worse, and the nascent labor recovery has not (yet) done anything to fix it.
Ideally, the labor market recovery should involve a falling unemployment rate (that everyone likes to talk about), and a rising labor force participation rate. Why? Because this combination points towards economic growth that is robust enough to draw discouraged workers back into the labor force. That is, demand for labor is so strong that workers who have given up looking for work, for whatever reason, are able to return to employment.
Of course, this ideal situation is a complex one involving global economic forces. For instance, there are discouraged workers whose skills are for jobs that simply no longer exist, or exist in much smaller quantities than they used to. Steel production, coal mining, and manufacturing jobs that have been outsourced are all good examples of this. Consequently, barring some kind of massive skill retraining taking place, we cannot expect the labor force participation rate to recover in a rapidly significant fashion.
What we can, and should expect, however, is a recovery in the participation rate that at least takes us back to pre-Covid levels. This is due to the fact that a significant number of the jobs lost during the pandemic were not lost to outsourcing, or workers’ skills becoming outdated. If workers who lost these kinds of jobs cannot return to employment in a similar capacity, that speaks to permanent damage; or the economy having permanently lost jobs and income due to the pandemic.
Of course, given the massive amounts of government intervention in the economy, what we should be expecting is for the participation rate to not just recover to its pre-Covid level, but also to exceed it. All those trillions have to count for something, right? Unfortunately not.
While we are seeing huge spikes in consumer inflation from fiscal stimulus, and optimism around a nascent labor market recovery, we are not seeing a commensurate improvement in the labor force participation rate. In other words, the economic and labor market recovery, in its current state, still isn’t robust enough.
To be continued…
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