Workers Hanging In There Are Good News For Economy, With Limits

By Shobhana Chandra and Jeanna Smialek Bloomberg News

WWR Article Summary (tl;dr) An improved labor market is giving unemployed Americans hope and keeping them in the job hunt, a change from recent years, when weak prospects forced many to drop out.

Bloomberg News

Adriana Mousso, a 44-year-old mother of six, has been looking for work she can take pride in since June. Giving up isn't on her mind.

"I want to have something that makes me feel good, a job that's going to contribute for my family," Mousso said. She mostly recently worked selling insurance and is looking for a job that draws on her prior experience in manufacturing project management. "It's just not an option to drop out."

An improved labor market is giving unemployed Americans hope and keeping them in the job hunt, a change from recent years, when weak prospects forced many to drop out. Employment seekers' new-found staying power is one explanation for a slight uptick in the labor force participation rate to 62.9 percent, which is defying aging demographics and is on track for its first annual increase in a decade.

"It doesn't benefit society at large, across a number of dimensions, to have able-bodied, competent workers drop out of the labor force," said Michael Gapen, New York-based chief U.S. economist for Barclays Capital Inc. Signs of "labor force attachment for somebody who has the skills to offer is a good thing."

The more it happens, "the more likely it is that that the long-run performance of the economy will improve over time" as available labor is put to use, he said.

Though the unemployment rate has halved since 2009, that happened as the workforce hemorrhaged job seekers and the participation rate sank to about a four-decade low, taking some of the shine off of the improvement.

The fact that many potential American workers remain sidelined has become a political talking point. Republican presidential candidate Donald Trump has said America's low unemployment rate is a hoax, implying the labor market is weaker than the data suggests.

That said, the slide in the participation rate has more to do with aging than anything else: About 10,000 baby boomers reach the retirement age of 65 each day, and older workers are less likely to work or look for jobs. Barclays calculates that since the 2007-2009 recession, about 30 percent of the decrease is cyclical and the rest is driven by demographics. The Labor Department will release the October figure in its monthly employment report Friday.

The workforce is aging and "we are not going to be able to dodge that," said Ryan Sweet, a senior economist at Moody's Analytics Inc. in West Chester, Pennsylvania. "An increase in the participation rate would definitely be helpful, but any firming is temporary."

What is causing the pickup for now, and how long-lived it may be, is crucial to understanding how much slack is left in the labor market, where the unemployment rate is headed, and what that means for wage growth, inflation and monetary policy.

Federal Reserve policy makers have expressed some satisfaction at the recent pickup in the participation rate, with Fed Vice Chairman Stanley Fischer calling it a welcome development. In September, Chair Janet Yellen cited this as one justification to give the economy room to run before raising rates.

Yellen said in September that the recent tick up in participation shows "a substantial number of people are being attracted into the labor market."

But a growing number of economists, including those at Societe Generale, Barclays and Goldman Sachs, have concluded that in the past year, the major driver of the improvement in participation is fewer exits from the labor force rather than a jump in entrants.

Goldman Sachs estimates that the probability of a long-term unemployed person dropping out is 25 percent, down about 5 percentage points from the end of 2015.

"The better labor market does not appear to be drawing workers back into the labor force just yet, but it seems to be causing the long-term unemployed to continue active search," Zach Pandl and David Mericle of Goldman Sachs said in a note.

Mousso, whose husband works as an engineering project manager, said she'd rather hold out for a job that fits her skills, but realistically she wants to be employed by year-end.

"If I take a job, I want to kick butt at it," said Mousso, who lives in Rochester, New York, "but also, I have a family to support and the longer it takes me, it impacts my family."

Fewer exits is a welcome outcome. But because it draws on a limited pool of people, it's less likely to produce a sustained increase in the participation rate than if discouraged workers were returning to the labor market in droves, said Barclays' Gapen.

This may seem like a quibble, but it matters. Re-entrants imply there's still more slack in the job market so "wages and inflation won't move higher as quickly as others would expect," Gapen said. Conversely, if people hanging on in the labor force to find employment are the predominant reason, as he believes, then diminished slack will spark wage and inflation pressures that the Fed would have to address.

For Sweet, of Moody's, the two outcomes aren't mutually exclusive. It may well be that fewer dropouts are the bigger drivers right now, and as worker pay climbs, re-entrants may take that spot.

"The tighter job market is making more people stay in the labor force, and that's step one," Sweet said. For those outside the labor force but who want a job "as wage growth accelerates, we'll pull more people back in. That's step two. We need both these."

More candidates are starting to approach ManpowerGroup Inc., a Milwaukee-based staffing company, asking for guidance on how to resume looking for a job.

"There is a huge percentage of the population that is capable of working that may not know where to start," said Kip Wright, senior vice president of Manpower North America.

Such workers will hopefully join the labor market recovery over time. Meanwhile, rising participation is conducive to growth for yet another reason.

"It is a sign of improved confidence not only in the job market but also in the economy," Sweet said. "If confidence continues to strengthen, for consumers and businesses, this expansion has plenty of room to run."

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