With job postings exceeding the amount of unemployed people, has the economy gotten to the point of what economists call “full employment”? This weeks market update by JP Morgan, one of the Portoflio Strategist we utilize for client accounts, suggests the Federal Reserve Bank may be thinking that way and explains why.
While the labor force participation rate remains at 61.8%, below pre-pandemic levels of 63.1%, it seems that the Fed is catching on to the idea that participation is unlikely to improve significantly from here. The labor force participation rate is the percentage of the population aged 16 and older that is either working or actively looking for a job, and this rate had been declining long before the pandemic. With the aging of baby boomers, the working population has skewed much older. The population that is aged 55+ accounted for 27% of the population in 1997. Today, it makes up 37%.
As we show on the chart, this demographic shift explains much of the secular downtrend in participation over the last 25 years. Add on the pandemic effects, and it seems that the wave of retirements we saw over the last two years has actually allowed participation to correct to its aging trend.
The economy is also seeing an unusually low number of immigrant workers due to the pandemic and tighter immigration policies in recent years. With a structurally smaller labor force, the current low unemployment rate of 3.9% clearly is indicative of a tight labor market that may already be at full employment. The Fed seems to have come to this conclusion, and while we may see some weakness in January’s employment report due to Omicron, it’s clear they feel the implications of a tight labor market for wages and inflation have raised the urgency to begin tightening policy.