“The labor force participation rate, a measure of how many people work or are actively looking for jobs, has been holding steady for months at 61.6 percent, down 1.7 percentage points from its February 2020 level.” (NYT, Nov. 5, 2021)

October was a relatively strong month in terms of the American job market. Nonfarm payroll employment rose by 531,000 in October and the unemployment rate slipped down 0.2 percentage point to 4.6%. 

The jobs expansion was very widespread in October, with notable gains in leisure and hospitality, professional and business services, manufacturing, and in transportation and warehousing. 

Even forgetting about the continuing damage, the pandemic has left behind the strong payroll expansion in October and the drop in the unemployment rate was very significant.  

After all the October unemployment rate was only slightly higher than its pre pandemic low of about 3.5%. But in assessing the true meaning of the 4.6% figure one cannot ignore the fact that many Americans have left the formal work force and are neither employed nor looking for work. 

Pre pandemic the American labour force participation rate (LFP) was over 63%, while currently it is only about 61%. In other words, there has been a major decline in the size of the potential work force in the US, which can be traced to the pandemic.

In terms of prime age workers aged 25 to 54 years old, the LFP rate had been gradually ticking up since its huge drop in 2020. Recently the LFP rate rose to 81.7% in October from 81.6% in September. But the LFP rate for prime age workers remains quite depressed compared with the rate before the pandemic. In February 2020, 82.9% of prime age workers were in the labour force.

Federal Reserve officials have been hoping that the American labour market would return to the participation and employment levels that prevailed before the pandemic. But over the past 20 months of the pandemic, anecdotes about early retirements abound, labour shortages are numerous, and many employees seem to be reassessing their work lives. In other words, despite the American economic recovery, many labour shortages are in evidence. 

It is important to note that worker shortages persisted even after federal government-funded unemployment benefits expired in early September and most schools fully reopened. 

Compounding the job shortage issue is the fact that over the longer term, the US LFP rate is expected to continue declining for demographic reason. 

The BLS projects for all working age groups the LFP rate should drop from 61.7% in in 2020 to 60.4% in 2030.

In closing, the US economy has come a long way since the depths of the pandemic and has added back more than 18 million jobs since the recovery started. But this still leaves America short 4.2 million jobs compared with February 2020. 

So don’t be misled by the strong October figures that a healthy and balanced job market is just around the corner. We still have a long way to go, and job shortages just make that task all the harder.

The Labour Force Participation Rate