• By
  • Michael S. Derby

The sharp, long running decline in the number of Americans interested and able to work stands a chance of reversing over coming years as long as the economy can continue to grow.

New research published by the Federal Reserve Bank of San Francisco Monday argues that a wide range of evidence suggests workers have dropped out of labor markets largely because of demand related issues, in a hopeful note for the employment outlook. As the economy picks up steam, the paper speculates these workers will come back to the job market and take advantage of an improved hiring landscape.

For several years now the economy has endured declines in what’s called the labor force participation rate, regardless of whether the economy was losing or adding jobs. Indeed, even as the recovery has taken hold and job growth has returned, the labor force participation rate has been drifting mostly lower. These declines have made the gradual lowering in the unemployment rate look less favorable than would otherwise be the case.


Some economists believe workers are being knocked out of the labor force due to incompatible skills and the stigma some suffer from extended spells of unemployment. That suggests a structural problem for labor markets.

The reason for the decline in the labor force participation rate is important for policymakers. If the rate of decline is structural, there is little Federal Reserve monetary policy can do about it. But if labor force participation is falling because demand is weak, there’s a chance stimulative central bank action can turn the trend around and improve the underlying state of labor markets.

The paper notes the biggest declines in the labor force participation rate have happened in states with the largest job losses. “This suggests that some of the recent drop in the national labor force participation rate could be cyclical,” economists Leila Bengali, Mary Daly and Rob Valletta wrote.

For the analysts, this suggests future labor force participation rates could begin to rise again. “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,” the economists wrote.



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