Fewer Workers: A Drag On US Growth (Part 3 of 6)
Since the onset of the recession in 2008, labor force participation in the United States has dropped by more than 3 percentage points. As the chart below shows, looking further back, since peaking in the late 1990s, the percentage of workers has dropped by 4.4 percentage points, meaning millions of individuals are no longer engaging in regular work.
Market Realist – Dipping participation rate could hurt growth.
The graph above shows the historical labor force participation rate in the US. Currently, the participation rate is 62.9%. This is slightly above December’s 62.7%.
Labor force is the number of individuals between the ages of 15 and 65, either employed or actively seeking work. It doesn’t include discouraged workers, homemakers, students above the age of 15, and retired individuals under 65 years of age. The labor force participation rate is the ratio of the labor force and population between the ages of 15 and 65.
One of the factors of this trend is the increase in productivity from technology (XLK). It replaced a lot of manual work.
Dipping labor force participation affected disposable income. As mentioned earlier, consumption makes up ~70% of the US gross domestic product, or GDP. If this trend continues, low consumption could slow down the GDP growth rate. This could put downward pressure on US equities (SPY)(IVV). Dipping labor force participation is also a developed world (EFA)(VEA) phenomenon.
Also, the unemployment rate dipped from nearly 10% during the financial crisis. Now, it’s around 5.7%. However, some of the decline in the unemployment rate can be attributed to the fact that some people are dropping out of the labor force.
In the next two parts of this series, we’ll explain the two demographic factors that led to the dip in the participation rate.
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