Since the US recovery began, the monthly jobs reports have carried a persistently sour note.
While joblessness has improved dramatically since the dark days of the recession, the labour force participation rate has been dropping steadily and remorselessly.
Policymakers believe at least some of the weakness is cyclical, and that people who have become detached from the jobs market could be pulled back if the Federal Reserve’s low interest rates generate sufficiently plentiful job opportunities.
This coming Friday’s numbers will shed light on whether the central bank is gaining any traction in this area. To date the evidence on labour force participation, which measures people in a job or actively looking for one, is far from encouraging.
What do the numbers show?
The jobs report for September showed the participation rate among the population aged 16 and over has dropped by half a percentage point since the start of the year to 62.4 per cent — the lowest since 1977.
A chunk of this phenomenon is down to predictable long-term factors, such as baby boomers retiring as the workforce ages, as well as increases in the number of people in full-time education — trends that central bankers can do little to influence.
But Ravi Balakrishnan, deputy chief of the North American division at the IMF, says that officials at the fund have been surprised by recent weakness in America’s participation figures, pointing to significant declines since May in the 25 to 34 age group, as well as for 45 to 54 year-olds.
“We are still trying to understand the causes,” he says. “We do think there is some kind of cyclical bounceback, but it may be weaker than we expected, or the demographic or structural downtrend may be stronger.”
Among prime-age Americans, the participation rate was among the weakest of the OECD nations at the end of 2014. Compared with the start of the current decade, only one major US age group has seen an increase in their labour force participation rate — the over-65s — and even there numbers have more or less flatlined after peaking in 2013.
The situation comes despite a sharp improvement in the headline rate of unemployment, which has dropped to 5.1 per cent from nearly twice that rate at the height of the recession.
What can policymakers do?
Some officials argue discouraged people could be lured into work by stimulative policies such as low interest rates. US Fed chair Janet Yellen has suggested there are arguments in favour of a temporary decline in the unemployment rate below the level that is estimated to be consistent, in the longer run, with inflation at 2 per cent.
This tight jobs market might be strong enough to pull people off the sidelines and into the workforce. People who are in part-time work but want a full-time post might also be able to take advantage of the better opportunities of an ultra-robust jobs market, and individuals stuck in long-term unemployment might also find openings easier to come by.
“There are many, many people who are not working but who would work if the right job came and smacked them,” said Justin Wolfers, Professor of Economics and Public Policy at the University of Michigan. “When an opportunity finds a person, that may bring them back to the labour force.”
Running a so-called “high pressure economy” could also help get inflation back to target quicker, policymakers such as John Williams, president of the San Francisco Fed, have said. The argument underlines the basic message from Ms Yellen in recent months — namely that even if the Fed lifts short-term rates, the increase will be very modest and subsequent moves gradual as the central bank supports the recovery.
What do sceptics say?
Some analysts question how much of an effect monetary policy will have on participation. Fed economists last year suggested that much, although not all, of the decline in participation since 2007 was structural in nature, making it tough to reverse.
Robert Mellman, an economist at JPMorgan Chase, has found that the share of the population outside the workforce who decide to look for work or go into a job has actually declined even as the US labour market has healed in recent years. There has also been an increase in the share of people leaving the labour force.
“It is possible that a hot labour market will attract more labour market entrants this time,” he said. “But the statistical evidence so far, and the anecdotal evidence we are hearing, suggests that falling unemployment rates are associated with more difficulty in hiring and retaining good workers, and not an increase in new labour market entrants.”
In this context, there is a risk that the Fed runs the economy too hot in its efforts to galvanise a transformation in the labour market, leading to excessive inflation or financial stability risks — even if the danger of high inflation currently appears to be a distant concern.
Initiatives in other realms of policy might have a more useful impact, some analysts say. For instance, family-friendly policies helping with the cost of childcare and parental leave might help more women to stay in the workforce, reversing the weakening position of recent years.
As things stand, however, America’s recent record on participation is leaving a serious scar on its jobs market recovery.