Participation and the Hot Labor Market

Summary

  • The labor force participation rate of prime-age (25–54 year old) Americans has risen almost 2 percentage points since its trough in 2015.
  • Labor force growth must be due to some combination of higher labor force entry rates and/or lower labor force exit rates; it is an open question how much each has contributed to the recent rise.
  • A recent study published by the Federal Reserve Bank of San Francisco (Barnichon (2019)) attributes virtually all of this rise to lower labor force exit and concludes that the tightening labor market of the last five years has not pulled in new workers.
  • By contrast, I show that this finding is not robust when looking at flows that are: 1.) adjusted for internal errors and inconsistencies; 2.) measured year-on-year rather than month-on-month; and, 3.) calculated from broader or narrower measures of labor supply.
  • I conclude that labor force entry likely explains between ⅓ to ½ of the rise in US prime-age participation from its recent trough, and that the level and slope of labor force flows suggest prime-age participation may have even further to rise in the absence of exogenous shocks.

Introduction

On bathtubs and participation

A recent FRBSF analysis suggests all of the participation rise stemmed from lower labor force exit.

Note that unadjusted month-to-month labor force exit is falling and may still have further to fall.

The distinction between unemployment and nonparticipation is often inconsistent within the CPS.

Once we adjust for these issues, labor force entry becomes a more important factor in month-to-month transitions.

This is confirmed when we look at year-to-year transitions.

The entry story is also confirmed when looking at employment flows instead…

…as well as with a broader labor force measure…

..and also, finally, with a synthetic labor force measure.

Conclusions: Putting it All Together

End Notes

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We write, crunch #’s, and tweet about the labor market and economic policy.

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