This Is Why Participation in the U.S. Workforce Has Plunged to Its Lowest Since 1977

June's typically a month when millions of people enter the labor force

U.S. Payrolls Rise 223K, Jobless Rate Falls to 5.3%

The size of the labor force tanked last month, helping to make for a very mixed June jobs report.

Though payrolls climbed at a healthy clip, some 432,000 people left the workforce, Labor Department data showed. That sent the participation rate — which tracks the share of working-age people who are either employed or looking for work — to 62.6 percent, the lowest level since October 1977. While the rate has been trending down ever since baby boomers started retiring in droves, the decrease last month was the sharpest in more than a year.

The decline was made all the more surprising by the fact that June tends to be a month where the U.S. sees loads of people moving into the labor force — think teenagers snagging lifeguard gigs, recent college graduates scouring the internet for job postings and teachers taking up summer work.  That "just did not happen," said Karen Kosanovich, an economist at the Bureau of Labor Statistics in Washington. 

In the last decade, an average 1.35 million workers have entered the labor force every June on a not seasonally adjusted basis. This year, the gain was 564,000. That translates into a decline for the seasonally adjusted data, since the monthly increase was much less than it usually is.

There could be a couple explanations for this. The BLS gets its labor force data from Current Population Survey, in which households say whether they were employed, unemployed and looking for work, or neither during the Sunday-to-Sunday period that includes the 12th day of the month.

Last month, this reference period occurred earlier than normal, and as a result a smaller share of the labor force gains were captured, according to Betsey Stevenson, a member of the President Barack Obama’s Council of Economic Advisers. This discrepancy could account for 500,000 people missing from the labor force, she wrote in a blog post.

Economists are also considering whether this year's severe winter weather is to blame for yet another disappointing data point. A high number of snow days could have extended the school year in some locations, limiting the normal flow of people into the workforce. 

"If that hypothesis is true, then we could see a substantial seasonally adjusted pop in labor force participation in July and likely a rebound in the unemployment rate,'' Stephen Stanley, chief economist at Amherst Pierpont Securities LLC, wrote in a note to clients. "I have my doubts about this hypothesis, but it makes more sense than to believe that the labor force collapsed in June because potential workers felt that there were no job prospects."

Certain demographic groups also showed significant drops. Some 402,000 men left the labor force on a seasonally adjusted basis,  accounting for 93 percent of the overall decline.

Looking at age groups, the labor force participation rate for workers 45 to 54 years old declined to 79.2 percent, the lowest since December 2013, from 79.6 percent. For 16- to 19-year-olds, it declined to 34.3 percent from 35 percent.

When there's no one clear cause as to what's responsible for labor force fluctuations, it's better to wait for more data before making a call, BLS's Kosanovich said. 

And parsing this trend will be increasingly important in the months to come, as Federal Reserve policy makers try to time their first interest rate increase since 2006. Gauging how much room for improvement is left in the labor force will be key to that decision.

Combined with the weakness in wage growth, the low labor force participation rate "will bolster the arguments of those on the Federal Open Market Committee who think that there is still a lot of slack in the labor market," Nariman Behravesh, chief economist at IHS Inc. in Lexington, Massachusetts, wrote in a note to clients.

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