As of September, the US labor force participation rate was 62.3. While we dipped down below that figure very briefly due to COVID-19 lock-downs, the US has fallen from peak levels between 1990 and 2000 and remained mired in the 62 range since 2013—a level we hadn’t been seen before since the mid-to-late 1970’s.
At first glance, one may dismiss the declining rate of labor participation, pointing to several factors such as the great productivity gains realized from the Internet and numerous technological advances and/or the natural demographic transition afoot with Baby Boomers retiring. While there are a host of trends and factors at play in the participation rate, this indicator is one to watch more so than the unemployment rate when seeking to diagnose the health of the overall labor market.
Why is our current lower level of labor participation problematic?
Over the longer term, a sustained lower level of labor force participation may have more unhealthy knock-on effects such as a drop in productivity rates and rising social services costs as people turn to government support.
Recent data points to a drop in overall productivity, as this chart below indicates. It is worth noting that the current productivity level has not been seen since the 1970s’.
US Nonfarm Business Labor Productivity Plummet
Chart courtesy of State Street Global Advisors.
Michael Arone, CFA, Chief Investment Strategist at State Street Global Advisors, provides a simple and clear assessment in a recent post titled ” Uncommon Sense:
“Simply stated, an increasing number of workers are producing less per hour. And, in today’s bizarre post-pandemic environment workers are getting paid more for producing that shrinking output. For example, Unit Labor Costs — how much a business pays its workers to produce one unit of output — rose 10.2% in the second quarter, following a 12.7% surge in the first quarter.1[i] Continued strong increases in employment while output is weak or falling are not sustainable.”
The long-term health of an economy is in part reliant on the participation and productivity of those within the economy. If too few work, or if too little production is generated, the system will not work at optimal levels over time. If the labor pool is too under-skilled or if too many incentives not to work exist, productivity will suffer and/or the numbers of those unwilling to work rise.
Examining the overall health of the system may be more useful for investors than “signs of strength”. An unhealthy condition within the labor market (persistent low levels of participation) can begin and fester while being covered up by a facade of strength (unemployment rate).
[i] “Productivity and Costs, Second Quarter 2022, Revised,” Bureau of Labor Statistics, September 1, 2022.