MNI INTERVIEW: Job Participation May Never Recover-Fed Adviser

The U.S. may never lure back all the workers laid off during the pandemic even if hiring gets back on track later this year, driving the jobless rate associated with full employment above 4%, Dallas Fed adviser Aysegul Sahin told MNI.

Labor force participation "barely stabilized" even when the economy was booming, Sahin, also an economics professor at the University of Texas at Austin, said in an interview. Female labor force participation was on a downtrend before Covid-19 and the "baby boomer" cohort was rapidly approaching retirement age.

The Covid recession has exacerbated these trends, inducing early retirement for older workers and forcing women to drop out of the labor force to care for children taken out of school, she said.

"The shock is clearly not gender neutral, and it's not age neutral," she said, and these long-run trends could put lasting downward pressure on the labor force. "Participation might never fully recover."

The labor force participation rate dropped to the lowest since 1973 last April at 60.2% from 63.3% last February, and has only climbed back to 61.4% since then.

'NATURAL RATE' IS RISING

The "natural rate" of unemployment has probably increased 30 to 40 basis points since the pandemic to 4.1%, Sahin said, estimating that the U.S. will reach full employment by the end of 2022. The Federal Reserve last year strengthened its mandate to restore full employment and some officials have expressed optimism about driving joblessness back to record lows around 3.5%.

"Even if everything gets fantastic in a day, it's still going to take the labor market time to work through its matching process," between workers and employers, she said. "We have reached the point where we are working through more permanently unemployed workers so it's going to take a while."

Still, the job market recovery has the potential to accelerate quickly, she said, and unemployment could fall below its natural rate before 2023.

"By the end of 2022, we are between 3.2% and 4.5%," she said, slightly more optimistic than the Fed's 3.7% median.

DIVIDED ON FISCAL RELIEF

That momentum will likely reduce the unemployment rate to 5.4% by the end of the year, she said. Even another nationwide lockdown like last spring wouldn't derail that result, she said, although it would temporarily push unemployment to 14.2% until hiring snapped back again. Targeted shutdowns of states with high Covid-19 infection rates lasting two months or less would likely drive the unemployment rate to 11%.

The unemployment rate fell to 6.3% in January, down from 14.7% in April. The Fed at its December meeting forecast a decline to 5% unemployment by the end of 2021 and 4.2% by 2022.

More fiscal relief has a relatively equal chance of helping or harming the recovery, Shain said, because direct cash payments could hurt labor supply while other relief programs could stimulate job creation.

Treasury Secretary Janet Yellen said earlier this month the U.S. will return to full employment by next year if Congress passes a USD1.9 trillion relief package including direct payments of USD1,400 and a continuation of the Paycheck Protection Program for small businesses.