Jobs Market Recovery Still Not Bringing Many Workers Back Into the Fold

Flows into the labor force have collapsed.

U.S. June Jobs Report Allays Concerns

Despite robust non-farm payrolls growth of 287,000 in June, the Federal Reserve might not be fully satisfied with the condition of the labor market.

The biggest reason? Labor force flows call into question the central bank's belief that a healthy job market will entice would-be workers to look for gainful employment. Or, at the very least, the data suggest there isn't a lot more improvement that can be had in this regard.

The rebound in headline labor force participation rate from 62.4 percent in September to 63 percent in March was perceived to be a sign that the Federal Reserve's hopes that job and wage growth would prompt Americans who had previously been on the sidelines to look for a job again were being realized.

But when Societe Generale Senior U.S. Economist Omair Sharif examined the data back in May, he found that the underlying story was quite different.

Labor force flows showed that the uptick in participation was fueled not by a surge in Americans joining, but rather fewer leaving. The mostly likely explanation is that a sizeable swath of workers elected to defer retirement.

And this pick-up in participation coincided with a general rise in average hourly earnings, suggesting that employers may have been able to entice these older workers to stick around by hiking wages. Conversely, the destruction of wealth that occurred in the wake of the financial crisis might mean that baby boomers feel a need to rebuild their net worth before they're able to comfortably retire.

After June's report, the deferred retirement story remains intact: flows out of the labor force remain well off their mid-2015 peak. However, flows into the labor force have since hit the skids.

FLOWS INTO LABOR FORCE
Source: Bloomberg

Sharif suggested this could be a short-term blip driven by large declines in April and May that have already begun to reverse as of June's print.

The bigger story, he said, is that the secular trend of an aging population remains firmly entrenched as a medium-term driver of labor force flows. As the share of Americans who aren't in the labor force increasingly becomes dominated by retired workers, it's a safe bet that the transition rate into the labor force will come under pressure.

"It's not that we're not pulling people back into the workforce," said Sharif, pointing to a steady slide in the number of Americans who aren't in the labor force because they are discouraged about their job prospects. "It's that the share of those who are not in the labor force who might come back in is smaller."

As such, any nascent upward moves in the headline labor force participation rate are unlikely to persist for very long.

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