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Don't Expect A Rebound In The Participation Rate

Published 11/27/2015, 04:29 AM
Updated 05/14/2017, 06:45 AM

It is tempting to ascribe the falling participation rate in the US to the downturn in growth but this conclusion would be wrong, in our view. Half of the decline in the participation rate is due to demographics, in particular the retirement of the Baby Boomer generation. The impact of cyclical forces is currently small, while there is a larger unexplained residual which may be temporary or structural in nature.

Although we factor in a decline in both the cyclical and residual component over the coming two years, it will only just cancel out the downward pressure from the aging effect. Hence, we expect the participation rate to be roughly stable in the near term before trending lower again. Our calculations suggest that trend growth in the labour force is around 150,000 per month in the next couple of years. In 2015 so far, employment growth has been around 200,000 per month, which implies that employment growth has to slow significantly before it will become a concern for the Fed.

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