SAN FRANCISCO – Workers who have dropped out of the labor force may take a few years to begin searching for work, Federal Reserve economists say in a paper offering insights into the health of a labor market that’s key to central bank policy.
In the current recovery, it will probably take a few years before cyclical components put significant upward pressure on the participation rate because payroll employment is still well below its pre-recession peak, Leila Bengali, Mary Daly and Rob Valletta said in a report released last week by the San Francisco Fed.
Economists have debated how much a slump in labor force participation stems from temporary effects such as weak economic growth or from more lasting forces like an aging work force. Participation is a key variable influencing the unemployment rate, which Fed officials are monitoring to gauge the appropriate level of stimulus.
Vice Chairman Janet Yellen said in March that a decline in unemployment reflecting job-seekers exiting the workforce may understate the actual degree of labor-market slack.
That’s why the Federal Open Market Committee is keeping an eye on a broad range of indicators to assess the state of U.S. employment, she said.
The Fed has expanded its balance sheet to $3.32 trillion with bond purchases aimed at spurring economic growth and reducing 7.5 percent unemployment. The FOMC said May 1 it will keep buying $85 billion in bonds each month and may increase or reduce the pace depending on the outlook for inflation and the labor market.
Labor force participation held at 63.3 percent in April for a second month, matching the lowest level since May 1979.
We find evidence, reinforcing other research, that the recent decline in participation likely has a substantial cyclical component, said the researchers. States that saw larger declines in employment generally saw larger declines in participation.