Restoring the labor-force participation rate to pre-2008 levels would be far more meaningful than what we find in a GDP calculation.
The share of working-age adults participating in the labor force tells us more about the economy and our culture than ever before.
T he labor-market data revealed by the Bureau of Labor Statistics the first Friday of each month has become a sort of blood-sport for both political junkies and market watchers. The political angle is easy to discern — a bad jobs report is deemed bad for incumbent politicians, and a good jobs report is inversely deemed good. The possibility of a disconnect between cause and effect here is ignored; the headline number is used to create or support a narrative and there is heavy political cheerleading attached to the data (one way or the other).
Market watchers have a different agenda. For years the basic assumption was that a strong jobs report indicated a strong economy, and therefore positive ramifications for markets. If more people were employed, it stood to reason that more people were buying goods and services, and therefore corporate profits should be growing. Associating good news in employment with good news in the economy seemed almost tautologically true for decades (with the same being true of the inverse — that bad news on the employment front was bad for the economy and corporate profits).
It is only a by-product of highly interventionist monetary policy that the opposite is now considered conventional wisdom. Low unemployment is considered inflationary (it is not) and the Fed is deemed to be the primary agent for countering inflation (it is not). Therefore, as current thinking goes, a positive jobs report is bad for financial markets because it implies ongoing Fed tightening while job losses are associated with a “cooler” economy — ergo, a Fed pivot. Up becomes down and left becomes right when the Federal Reserve is granted the role of deity in economic stewardship.
A casualty in politics-centered or Fed-centered analysis of jobs data is focusing on the cultural reality of our labor force. The labor-force participation rate (those working combined with those actively looking for work as a percentage of the non-institutionalized, working-age population) was steady and reliably around 66 or 67 percent for years before the financial crisis. The number dropped to between 62 and 63 percent after that and only started to trend higher after the deregulation and tax reform of 2017–18. That, of course, was upended by Covid and the 2020 shutdowns.
As we now know, the economic pain of the shutdowns reversed quickly, and not only did economic activity resume by late 2020, with strong GDP growth in 2021, but the unemployment rate dropped quickly. Indeed, the narrative of 2021 shockingly became one of inadequate access to workers instead of millions looking for work. One problem was seemingly solved, but another problem was seemingly created.
That problem is the failure of the labor-force participation rate to return to normal. At approximately 62 percent, we sit 1.5 percentage points below pre-Covid levels despite the economic normalization that has taken place in almost all other categories. While 1.5 percentage points may seem like a small number, with a working-age population of about 260 million people, it means we are about 4 million people below the trend-line number from before Covid. And paradoxically, this comes with more job openings than we have people looking for jobs.
The inability to return to pre-Covid levels in the workforce since economic reopenings began is only the latest episode of the nearly 15-year story of lower labor-force participation since the financial crisis. The majority of the reduction can be found in men over the age of 55, though young adults post–high school are also less likely to work than they used to be.
One of the most underrated explanations of 2021 inflation is found in the reduction of workers available to produce needed goods and services in a supply-constrained economy. Total consumption and aggregate demand never rose above pre-Covid levels, but supply and available workers stayed below them. From truck drivers to package handlers to food-and-beverage to hospitality, the supply of workers has been below the need, and prices have correspondingly increased.
The White House is well aware of this challenge and is apparently looking at ways to throw money at it. Increasing benefits and transfer payments to incentivize people back to work risks exacerbating the problem. Transfer payments without a work requirement will result in more people not working. Incentives still matter.
More concerning than the broad economic impact of the reduced labor-force participation rate is the cultural impact. The American ethos values the dignity of work and sees purpose, meaning, and hope in productive activity. Not only does our economy desperately need the full weight of American ingenuity, innovation, and productivity, but our souls do as well. In a time of increased alienation, isolation, and desperation, a larger labor force would mean a greater number of people engaged in meaningful activity with attendant duties and responsibilities. It would allow for less substance abuse, less emotional angst, and more pursuits of passions.
The unemployment rate (those unemployed divided by those in the labor force) can be a deceptive metric if the labor-force participation rate is shrinking. Our goal must be not only maximum employment of those looking for work, but also that more people who are able to participate in the labor force actually do so. A society of self-government that values human dignity does not encourage late entry to or early exit from the labor force. A labor-force participation rate equal to our pre-2008 levels is attainable, but not without a resurgence of values focused on productivity. The end result would be far more meaningful than what we find in a GDP calculation.