WASHINGTON (Reuters) — The White House said on Thursday it expects America's strengthening economy will temporarily halt the troubling decline in the share of workers who have jobs or are looking for one.
Policymakers and investors are closely following this measure of the population's engagement with working life for two main reasons.
First, if the labor force participation rate continued to decline sharply as it has since the 2007-09 recession, it could mean higher rates of inflation lurk around the corner and will require the Federal Reserve to raise interest rates soon.
At just under 63 per cent, the participation rate has dropped to its lowest levels since the 1970s.
Economists at the White House, however, said their analysis of labour market history suggested much of the recent decline in the rate was because a weak economy had led out-of-work Americans to put off their jobs hunts.
"As the economy continues to return to full employment, this cyclical factor will continue to dissipate," the Council of Economic Advisers said in a report. "The participation rate is likely to be roughly stable in the near term."
In this regard, the White House view aligns with that of Fed Chair Janet Yellen, who was picked by President Barack Obama last year to head the U.S. central bank.
Yellen also expects workers to reenter the labour force as the economy plods back to health. The extra people seeking jobs could reduce any upward pressure on wages and thus inflation, giving Yellen breathing room before she has to raise rates. Many economists expect the first rate hikes will come next year. Low rates of inflation could set back the timing.
The second reason to care about the labour force participation rate is that its long-term decline could have troubling implications for the U.S. economy's underlying health.
A major aspect of the decline is due to the country's aging. A fall in birthrates mean society will gray for decades to come, stressing the government's ability to pay pensions and medical care.
Another worrisome factor is the relatively mysterious 60-year decline in labor force participation among so-called prime age workers, particularly men aged 25-54. Economists theorize the decline is due to a tougher labor market for workers displaced by technological advances and foreign competition.
These longer-term trends are why the White House sees the participation rate resuming its decline after the economy fully recovers from the recession.
Smaller growth in the supply of labor implies weaker economic growth potential, and the White House said the best hopes of countering this could lie in policies that would foster more immigration or make it easier for women to work after having children.
"Absent changes in policies, a meaningful increase in the participation rate from current rates appears unlikely," the report said.