While the June employment report had its pros (payrolls) and cons (wages), one number attracted attention: the increase in the labor force participation rate, which rose from 62.7 to 62.9, as more people returned to the labor force, in the process sending the number of unemployed workers higher by half a million.
That said, the move was modest, and as Goldman writes in a Q&A note looking at the participation rate, month-to-month changes in the participation rate are quite noisy, with the standard deviation at 0.14pp over the last 10 years.
the participation rate simply moved up in June near the top end of the 62.3%-63.0% range that has prevailed since early 2014. Over this period, the cyclical participation tailwinds have offset the impact of the structural headwinds, of which a ¼pp trend decline due to aging is the most important contributor.
Whatever the reason behind the monthly increase, a more troubling trend is the ongoing secular decline in the participation rate, especially in the context of other developed economies, where despite economic difficulties, the number of people who end up in the labor force has been rising, a stark contrast with the US. Here is GOldman's view on what is going on here:
Q: The prime-age participation rate is still well below pre-crisis levels. How unusual is the US performance over the last decade from an international perspective?
A: Pretty unusual, especially for prime-age women. The female prime-age participation is still 0.4pp below the 2007Q1 level in the US while it has actually risen in all the other large advanced economies in our sample and by 4.3pp on average (Exhibit 2, left panel).[1] It appears that the social trend of rising female participation in the US came to an end in the 1990s but is probably still ongoing elsewhere (see here for an analysis of the rise in German female participation). As a result, the US female prime-age participation rate is now 4.5pp below the weighted ex-US average and only trailed by Italy’s. Our forecast incorporates a continued moderate cyclical increase in female prime-age participation in 2018H2 and 2019.
Despite a recent pick-up, the male prime-age participation rate has fallen 2.2pp since 2007Q1 in the US vs. only 1.0pp on average in the other DMs (Exhibit 2, right panel). The US male prime-age participation rate is now more than 3pp below the weighted average and nearly 7pp below the Japanese rate.
Of course, regular readers are familiar with this phenomenon which we have covered for the better part of the past decade. But what remains elusive is the answer to the question why is this taking place?
According to Goldman the answer is two-fold: junkies and prisoners, or as Goldman puts it, "the US opioid and incarceration issues ... each explain roughly one-sixth of the US prime-age male participation underperformance, or one-third combined", or...