The February non-farm payroll report was the last bit of economic data that could derail the Fed’s expected rate hike this week. ADP reported a 298,000 private payroll increase on Wednesday which was the largest number since April 2014. Then on Friday the non-farm payroll number came in at 235,000 which exceeded economists’ estimates of 200,000. Another important labor market indicator, the labor force participation rate, improved to 63%. Let’s take a look at the labor force participation rate in more detail.
Labor Force Participation Rate
The labor force participation rate has been on a downward trend since it peaked in March 2000 at 67.3%. The report last week indicated the participation rate rose to 63% which was the highest since March of last year.
What is the labor force participation rate?
The participation rates measures the percentage of the working age civilian population who are either employed or looking for work. The Bureau of Labor Statistics reports on this data monthly, typically on the first Friday of the month.
The number of economic reports can become overwhelming so let’s define what the BLS refers to as the labor force and the total working-age population.
Total working-age population includes anyone who is of working age which means over the age of 16.
Civilian labor force includes anyone over the age of 16 who is employed or who is looking for work.
For February, there were just over 254 million people in the working-age population and 160 million in the labor force. Divide 160 by 254 and that’s where the 63% labor force participation rate comes from.
Why has the labor force participation rate been falling?
The BLS found several reasons why the participation rate has fallen over the past 2 decades.
One of the reasons is because fewer teenagers are participating in the labor force. Is this because we are raising lazy bums who want to live off their parents? Not entirely.
The study found school enrollment also rose for teenagers which means if they are spending time in school they have less time available to work. This should be viewed as a positive as we want to have a better educated population to lead to long-term technological innovation and GDP growth. Unfortunately, the study also found the participation rate fell for kids who are not enrolled in school. If you aren’t working or going to school what are you doing all day?
Another reason is due to baby boomers reaching retirement age and beginning to draw Social Security benefits. As this generation continues to age they will become a larger percentage of the overall population. This study found that by 2029 about 20% of the total population will be over the age of 65 which would be up from 14% in 2012. That means their jobs will need to be filled by humans or machines (robots).
Why does the labor force participation rate matter?
A strong economy and labor force entices people to want to find a job to earn money and better themselves. An increase in the participation rate means that people are re-entering the labor force because they want to work. Rising wages helps.
What was interesting about the February labor market report was that the participation rose .1% AND the unemployment rate fell .1%. There are more labor force participants AND more participants are finding work. This points to a stronger labor market and a stronger economy. A stronger labor market and economy means the Fed should be comfortable normalizing interest rates so we can get back to less central bank intervention which has been distorting financial markets and the pricing of risk.
As the labor force continues to “tighten” we should expect to see higher wages and hopefully the trend of a higher labor force participation rate will continue. We do have the demographic factor of the baby boomers retiring working against us.
All told this was a good report for the U.S. labor market.