US labor force participation still lags despite falling jobless rate

A
worker prepares to move a piece of pipe into place as he build a
new home on January 21, 2015 in Petaluma, California. According
to a Commerce Department report, construction of new homes
increased 4.4 percent in December, pushing building of new homes
to the highest level in nine years.
Justin Sullivan/Getty

• Richmond Fed President Thomas Barkin is worried
  policymakers may lack the tools to deal with the next
  recession.
• With that in mind, he says, looking for ways to
  strengthen US labor-force participation could create a crucial
  buffer before the next downturn.

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The Federal
Reserve may have limited tools to deal with the next
recession, making it imperative that policymakers find ways to
further strengthen an already much-improved labor market before
the next economic downturn, Richmond Fed President Thomas Barkin
said in a speech Wednesday.

“I’m concerned about monetary and fiscal policymakers’
capabilities to provide an effective backstop in the next
recession,” said Barkin, who joined the Fed in January. “But
stronger underlying growth would address this concern. Stronger
growth would allow the FOMC to raise rates higher without
constraining the economy, giving us more ammunition when we need
it.”

In particular, Barkin is focused on ways of further beefing up
the labor market, which has seen the unemployment rate drop
sharply from a Great Recession peak of 10% down to just 3.9% in
July.

How can policymakers do this if the job market is already running
hot? Barkin cites low labor-force participation as a sign of
continued fragility.

“L
abor force growth requires tackling the many
labor segments operating under their full potential,” Barkin
said. “For example, there’s a large divide between urban and
rural areas; here in Virginia the employment-to-population ratio
among working-age adults is about six points higher in urban
areas than in rural areas. People in rural areas often don’t have
the same opportunities as people in urban areas. At the same
time, there are divides within cities.”

Barkin, who is a voter this year on the Federal Open Market
Committee, was broadly supportive, if cautious, about ongoing
interest rate hikes from the Fed, the next of which is expected
in September.

“When the economy calls for moving back to normal levels,
as do the conditions I just described, we should follow through,”
he said, adding that “how high rates will ultimately need to rise
depends on economic growth: The higher the underlying growth
prospects, the higher the policy rate.” The current range for the
federal funds rate is 1.75% to 2%.

Still, he emphasized other things economic policymakers,
including the Fed, Congress, as well as state and local
governments can do to improve outcomes across a wider
spectrum.

“There might be other levers policymakers can pull to
increase the labor force, such as providing more opportunities to
rural and inner-city communities,” he said. “That includes
creating jobs in both places as well as investing in initiatives
that
enable people to travel to, or live near, the
jobs.” 

Barkin also cited greater availability of child care and
paid leave as way of supporting increased female workforce
participation, and the importance of attracting immigrants, “who
bring with them much-needed skills and entrepreneurial
energy.”

US labor-force participation was already on a steady
decline in the run-up to the Great Recession of 2007-2009, but
the decline clearly accelerated during the slump. It has yet to
rebound in any noticeable way. 

St. Louis Fed