Bruce Krasting — On The Labor Force Participation Rate

I was blown out by the Labor Force Participation Rate (LFPR) data released Friday. Down 4 tics to 62.8%. That sounds like no big deal, but it is. Either there is something out of whack with the data, and it will be revised, or there will have to be some serious rethinking by the folks who develop long-term economic models, and also at the Federal Reserve.
Consider the short term consequences. The Fed has hung its monetary hat on an unemployment rate of 6.5%. We have been told, time and again, that if the magic number of 6.5% unemployment is reached, the madness of US monetary policy will be relaxed. Should the LFPR continue to drop, the hurdle rate for changes to Fed policy will come sooner than is anticipated.

The Atlanta Fed has an interactive tool that looks at this (Link). It takes into consideration the variables of the unemployment picture and produces a report of how many jobs are needed per month over a given period, to achieve the 6.5% level....

I've looked at long-term forecasts for LFPR from CBO and BLS. They all have the participation rate dropping over time, but they do not have the drop occurring in the present. What if the 'New Normal' is a participation rate that hangs in the low 60% level for the next decade? It translates into much larger deficits at the Federal and State levels. It means that there will be less consumption as there will be fewer paychecks, and that means a much lower rate of growth of GDP.

So either the LFPR turns around and starts headed higher very soon (and stays higher for another decade), or the USA is in for a prolonged period of sub par growth and very high annual deficits.

On The Labor Force Participation Rate
Bruce Krasting