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Labour Force Flows - Implications For The Fed‏

ByDanske Markets
Published 05/22/2013, 08:28 AM
Updated 05/14/2017, 06:45 AM

The labour force participation rate has declined rapidly over recent years. Our analysis shows that only part of the decline is caused by cyclical factors.

Even if participation rates return to normal levels, demographics will keep a lid on labour force growth. This means that the Fed's 6.5% unemployment threshold is likely to be reached around mid-2015.

A standard Taylor rule would suggest a much earlier start to the Fed's hiking cycle. The emphasis on inflation versus unemployment is in our view biased currently.

Labour force set for a cyclical rebound but trend is slowing
In general the developments in the labour force participation rate, defined as the percentage of the population aged 16 years and older in the labour force, can be divided into three distinct phases since 1950.

The first phase is characterised by a relatively stable participation rate and lasts until the mid-1960s. The second phase is characterised by a sharp increase in labour force participation driven by more women entering the labour force and the entering of the baby boom generation into age cohorts with high levels of labour force participation.

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