Much ado has been made about the decline in the participation rate as evidence of a weak cyclical recovery in the US labor market. It means nothing of the sort.
The participation rate measures the share of Americans who currently have jobs as a percent of the civilian non-institutional (ie, not in jail) population. In the 1950s, the rate was around 59%, started increasing in the mid-1960s, peaked at 67% in 2000, and has been on a downward slope ever since. The participation rate is now 63%, a multi-decade low. Analyzing the participation rate by gender provides a clearer picture of whatâ€™s really going on.
For men, the participation rate started out at 87% back in the 1950s but has been steadily declining ever since and now stands at 70%. There are many factors at work, but the simple truth is that Americans are getting older: while many senior citizens choose to keep working, those who retire drop out of the ranks of the employed but remain part of the civilian population, thereby dampening the participation rate.
For women, there is more to the story. Back in the 1950s, their participation rate was just 35% but rose for the next several decades and eventually reached 60% in 2000. After the surge of women into the labor force peaked, the womenâ€™s participation rate began to decline as they too got older and is now 57%.
The point becomes crystal clear when focusing on Americans in their prime working years. The participation rate for people between 25 and 54, is currently 81%, down about two percentage points from five years ago but exactly where it was five months ago. The delayed entry of younger workers into the labor force and the steady increase of older Americans both present policy challenges, but the overall participation rate is not sounding alarm bells for the economic recovery.
The bottom line is that the labor market might be weak or strong (and we think itâ€™s stronger than the recent data suggests), but the participation rate is a poor guide to those cyclical changes. Itâ€™s been mainly demographics all along. The participation rate surged because women came into the labor force. It is now declining because all Americans â€“ men and women â€“ are getting older. There is no real cyclical story here.
Warren Hatch, PhD, CFA
Chief Investment Strategist
McAlinden Research - a division of Catalpa Capital Advisors, LLC.