Question #4 for 2022: Will the overall participation rate increase to pre-pandemic levels (63.4% in February 2020)?

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by Calculated Risk on 1/03/2022 12:52:00 PM

Earlier I posted some questions on my blog: Ten Economic Questions for 2022. Some of these questions concern real estate (inventory, house prices, housing credit, housing starts, new home sales), and I posted those in the newsletter (others like GDP and employment will be on my blog).

I’m adding some thoughts, and maybe some predictions for each question.

4) Participation Rate: In November 2021, the overall participation rate was at 61.8%, up year-over-year from 61.5% in November 2020. Long term, the BLS is projecting the overall participation rate will decline to 60.4% by 2030 due to demographics. Will the overall participation rate increase to pre-pandemic levels (63.4% in February 2020)? What will be the participation rate in December 2022?

The overall labor force participation rate is the percentage of the working age population (16 + years old) in the labor force. A large portion of the decline in the participation rate since 2000 was due to demographics and long-term trends.

The Labor Force Participation Rate in November 2021 was at 61.8 (red), down from the pre-pandemic level of 63.4% in February, and up from the pandemic low of 60.2% in April 2020. (Blue is the employment population ratio).

In April 2020, 8.0 million people had left the labor force due to the pandemic. By November 2021, about 5.6 million had returned to the labor force, leaving 2.4 million fewer people in the labor force than prior to the pandemic. And this doesn’t count for growth in the 18+ population.

In November 2021, Goldman Sachs economists put out a research note on the labor force participation rate: Why Isn’t Labor Force Participation Recovering?

Here are few excerpts from the note:

“While the unemployment rate continues to fall quickly, labor force participation has made no progress since August 2020. … Most of the 5.0mn persons who have exited the labor force since the start of the pandemic are over age 55 (3.4mn), largely reflecting early (1.5mn) and natural (1mn) retirements that likely won’t reverse. The outlook for prime-age persons who have exited the labor force (1.7mn) is more positive, since very few are discouraged and most still view their exits as temporary.”

Note: The 5 million number for the labor force, probably assumes some normal labor force growth; however, overall population growth has been dismal over the last 2 years (little immigration and large number of deaths). I’m not confident in Goldman’s 5-million-person estimate.

Here is a graph of the number of missing people by age group (from the CPS household survey).

This data is comparing November 2021 to November 2019, using Not Seasonally Adjusted (NSA) data (I compared to November 2019 to minimize the seasonal impact when using NSA data).

Positive numbers are missing workers.

Almost all of the missing employed workers – by this method – are in the 25 to 29 and in the 45 to 59 age groups.

Note: this is over a 2-year period, and there have been some demographic shifts between cohorts.

This data would suggest most of the missing workers are prime age or took early retirement (the missing workers in their ’50s).

Note: In September, the BLS released their updated Labor Force projections through 2030. Their projections show the overall Labor Force Participation Rate (LFPR) declining to 60.4% in 2030. We need to remember this demographic trend.

My guess, based on the impact of the pandemic easing, is that most of these people will return to the labor force. I don’t expect that participation rate to increase to pre-pandemic levels (63.4%), but it seems reasonable the participation rate will increase to the mid 62s by year end, before trending down again later in the decade.

Some thoughts: