Fed study of labor participation finds U.S. at full employment

The U.S. labor market doesn’t have much more room to tighten, according to a new study from the Federal Reserve Bank of San Francisco that examines trends in the number of Americans who are either working or looking for jobs for clues on remaining slack.

“Our estimates indicate that the aggregate labor force participation rate is at its trend as of 2018,” the regional Fed bank concluded in an Economic Letter published Monday. “Combined with the low unemployment rate, this argues that the U.S. labor market is operating at or beyond its full potential.”

Labor force participation measures the share of people aged 16 or older who are either in work or seeking employment. It started declining in the U.S. around 2000 and the trend accelerated during the 2007-2009 recession, though the rate has since steadied.

The gauge offers a hint of where the economy is operating relative to full employment: if it had room to increase, that would give employers a wider pool of potential candidates to hire and the labor market would be less tight than the jobless rate alone suggested.

Central bankers care about that because an overly-tight labor market could spur higher wage gains that eventually show up as unwanted inflation. U.S. unemployment is currently 3.7 percent, the lowest level since 1969, though inflation remains at the Fed’s 2 percent target.

The study noted that the labor force participation rate since 2015 had stabilized around 62.8 percent. After examining the underlying changes in the U.S. population, including in terms of aging and of educational attainment, it concluded that this level represents the long-run trend level of labor force participation. The study also predicted this would decline about 2.5 percentage points over the next 10 years.

“Almost the entire projected future decline is driven by population aging,” the authors wrote.