Fed Researchers: Labor Participation May Stay Low for Years

Tuesday, 14 May 2013 07:07 AM

 

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Federal Reserve economists said workers who have dropped out of the labor market may take a few years to begin searching for a job.

“In the current recovery, it will probably take a few years before cyclical components put significant upward pressure on the participation rate because payroll employment is still well below its pre-recession peak,” Leila Bengali, Mary Daly and Rob Valletta said in a report released Monday by the San Franciso Fed.

Economists have debated how much a slump in labor force participation stems from temporary effects such as weak economic growth or from more lasting forces like the increasing average age of the work force.

Participation is a key variable influencing the unemployment rate, which Fed officials are monitoring to gauge the level of accommodation.

The Federal Open Market Committee said May 1 it will keep buying $85 billion in bonds each month and may increase or reduce the pace depending on the outlook for inflation and the labor market.

The Fed has expanded its balance sheet to $3.32 trillion with bond purchases aimed at spurring economic growth and reducing 7.5 percent unemployment.

Labor force participation held at 63.3 percent in April for a second month, matching the lowest level since May 1979.

“We find evidence, reinforcing other research, that the recent decline in participation likely has a substantial cyclical component,” said the researchers. “States that saw larger declines in employment generally saw larger declines in participation.”

Weak Relationship

Bengali, Daly and Valletta found that the relationship between employment and participation has so far been weak in the economic recovery that started in 2009, noting that payrolls have yet to approach their pre-recession peak.

“In the recoveries from the 1981-82 and 1990-91 recessions, the positive relationship did not emerge until the economy had passed the previous employment peak by a substantial margin,” they said.

“We may not be deep enough into the current recovery for the typical positive relationship between participation and employment growth to emerge.”

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