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The Fed wants to keep rates low until recoveries in labor force participation, and not just unemployment.
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Federal Reserve officials are determined to regain pre-Covid levels of labor force participation despite concerns pandemic disruption has reduced the ability of the economy to create jobs, likely extending the period needed for interest rates to stay ultra-low to reach employment goals, current and former Fed economists told MNI.
Policymakers remain optimistic most of the millions who have exited the workforce during Covid will be pulled back once life returns to normal later this year, with easy monetary policy generating opportunities for those hit hardest, in particular women, blacks and Hispanics, sources said.
The employment-to-population ratio, or EPOP, has become a top indicator for the U.S. central bank since its definition of maximum employment was modified to a "broad-based and inclusive goal" last year, sources said. Fed Chair Jay Powell and others cite 10% as a better estimate of the unemployment rate, a figure that counts those who left the workforce last year as unemployed. Labor force participation rebounded to 61.4% in January but was still at the lowest since 1976, and headline unemployment was 6.3%.
"There's been no compelling argument why February 2020 shouldn't be the benchmark," former Fed Board research director David Wilcox told MNI. "The burden of proof will be for those to argue that it's not attainable, and that would have to involve sustained upward pressure in inflation beyond the 2% objective. And Fed officials have made clear they'll tolerate a modest overshoot for a period of time."
WANTING A JOB
Most workers who dropped out of the labor market in the past year did so for reasons closely tied to the pandemic -- lockdowns, weak demand for travel and in-restaurant dining and child care responsibilities due to school closings, Fed economists said in interviews. While many older workers may now opt for retirement, those who are younger may want to return quickly.
Prime age female workers, aged 25 to 54, saw a 2pp drop in their participation rate over 2020, reversing a decade of gains. Nearly all of the women who left the labor force reported either wanting a job but not actively looking or not working because of family responsibilities, according to the Atlanta Fed Labor Force Participation Dynamics Tool.
Over two-thirds of the 3pp decline in black prime-age participation last year is attributed to a rise in the share of those wanting a job but not currently searching. Of Hispanic women, whose participation rate declined just over 2pps during 2020 and who tend to have more children, half said they were not seeking work due to family responsibilities. Black and Hispanic workers are also overrepresented in pandemic-hit industries, such as hotels and restaurants.
"We can anticipate participation to come back reasonably quickly because the demand is there, because the infrastructure is there, hotels and restaurants are still there," Atlanta Fed economist John Robertson told MNI. "It won't be as fast as the downshift. It's going to take some time for businesses to ramp up, but it could be reasonably quickly."
"Once normality has returned, I would expect LFPR would shoot up pretty quickly to where we were before the Covid shock," Richmond Fed senior adviser Thomas Lubik told MNI. "A very optimistic scenario is by the end of this year. By the end of next year, I would expect pretty much normality."
Labor market scarring is "less of a concern this time around," he said, because the Covid shock differs from the Great Recession in that it is concentrated in the services sector. "We still see a lot of churning in the labor market," Lubik added. The share of people unemployed for longer than six months, at 40%, remains below the Great Recession's peak, and job openings have been healthy after a brief dip last year, with job-finding and quitting rates holding up well.
Other Fed economists are more cautious. Fatih Karahan and Laura Pilossoph of the New York Fed cited HomeBase payrolls data showing businesses are less likely to reopen if they closed for more than three months during the pandemic, and have a harder time hiring workers if they do reopen.
Black workers in particular are at risk. Their job finding rate improved on par with that of whites over recent months but their labor force exit rate spiked from June whereas for white workers this has reverted to pre-pandemic levels.
Data suggest labor force participation for black workers may remain "significantly depressed in the coming months," Karahan said, citing a reduced likelihood of finding a job when not looking for one -- the rate is typically 5% compared with 30% for those actively searching.
Structural shifts in the post-pandemic labor market are also possible, economists said. As working from home gains favor, demand for office space and for restaurants and bars serving workers could fall permanently. Less business travel and accelerated automation could also prompt a reallocation of jobs.