Labor Participation Rate & DeflationMay 05, 2014
Due to a variety of factors–some structural like the ageing of the baby boomers–and some cyclical–like the global financial crisis of 2008 have weighed on labor participation in the US economy. Last Friday, in the monthly employment report, we saw the participation rate fall back to its cycle low of 62.8%. The participation rate 67.3% in April 2000 and has shed some 4.5% since then. Using updated figures form the CBO, we modeled out the expectation for the future path of the participation in the chart below.
The CBO perdicts an overall peak-to-trough decline of roughly 8% over the forecast horizon. With the participation rate falling, it makes growth in the labor force very difficult. Over the last five years, the labor force has grown on average .13%.
Economic growth is a function of two basic ingredients: 1) labor productivity growth and 2) labor force growth. The concerning trends in the participation rate, and in turn the labor force growth rate, raise questions as to achievable growth rate of the US economy.
The one bit of good news in this whole story relates to inflation. Our research suggests that a declining participation rate suppresses inflation in the economy. In the chart below, we overlay the participation rate with the CPI, calling out different inflation rates over time.
In this next chart, we take the five year moving average of the annual change in the participation rate and set it alongside the year-over-year change in the CPI. Falling participation rates are deflationary.