Labor Participation Rate & InflationFebruary 07, 2014
One of the disappointing features of the current recovery is the weakness in the labor participation rate. While last month the participation rate rose .2% from multi-decade lows, it is still down over 4% from the peak in 2001. An increasing participation rate has historically been inflationary while a falling one exerts deflationary pressure on the US economy. In the chart below, we plot the labor participation rate against inflation, and it is easy to see the historic relationship. In the 1970s, the rate rose over 3% and generated accelerating inflation into the 1980s. In the 2000s, as the rate began to fall, so has inflation, dropping from 4% in 2006, to near 1% currently.
From a slightly different point of view, we show below the year over year change in the consumer price index (CPI) plotted against the five year moving average of the year over year change in the participation rate. The drop in the this longer term view of the participation rate suggests that the weak labor markets are exerting a strong deflationary force.