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A long hoped-for rebound in workforce participation after schools reopen and jobless benefits expire next month may not materialize quickly, Federal Reserve economists told MNI, in comments echoing the case made by Fed officials who believe the economy will need support from near-zero interest rates into 2023.
The Fed will soon turn its attention to how quickly the U.S. labor force can recover to pre-pandemic levels, as policymakers come close to nailing down a timeline for tapering QE and policy debate shifts toward the timing of eventual interest rate hikes.
Andreas Hornstein, senior adviser at the Richmond Fed's research department, expects a slow recovery in participation, in line with the experience of past recessions.
"We'll see a gradual improvement, but it's not obvious to me that there are going to be any discrete bumps in the data in the short-term," he said in an interview. "Even if all schools reopen you're not likely to see a big impact just coming from the participation decisions of parents."
New research from three Fed board of governors economists finds that participation is "highly cyclical" but recovers much less quickly than unemployment after a downturn. In the four recessions before Covid, the lag has been about two years.
That suggests this year's boom in labor demand and output growth will eventually flow through to boost the participation rate, but potentiallynot until until months down the line.
Workers over age 55, who retired at outsize rates during the pandemic, are decently likely to return to a booming market, though with an even longer lag, the paper suggests.
The share of adults either working or looking for work recovered by just a tenth to 61.7% in July and has remained within a narrow range of 61.4% to 61.7% since June 2020. Its pre-pandemic peak was 63.4% and rising. The employment-to-population ratio remains near levels not seen since the depths of the Great Recession.
DEGREES OF SLACK
The focus of Fed debate centers not just on how quickly participation can recover but also on what the new, post-Covid norm might look like. Some officials have pointed to the wave of early retirements as potentially forcing a fairly long-standing decline in participation.
Policymakers are looking to September, when schools reopen and extra federal unemployment benefits roll off, to get more clarity on labor market trends. But, while acknowledging that participation could rebound if there is a quick resolution of factors unique to the pandemic such as fear of contracting the virus and the closure of daycares, researchers and advisers said it is more likely that participation recovers at a much slower pace.
"We're in a situation where there are a lot of people who want to be employed in one sense but are clearly not ready to take jobs, because the vacancies are out there but they're not taking them," said Cleveland Fed economist Bruce Fallick. "In that sense there's a lot of slack -- those people are underutilized labor resources -- but it's not slack in the usual sense of they're not working because there is not enough labor demand."
Some policymakers see recent data on vacancies and anecdotes of labor shortages as a sign the economy is already approaching maximum employment -- despite being some 6 million jobs short of pre-pandemic levels. Others favor reserving judgment for another year to see if labor supply and demand realign themselves.
The large number of women forced to leave the workforce during Covid because of caretaking duties is largely seen as reversible, if also over a longer-run timeframe.
"The large role of women's employment losses in this recession are likely to result in continued low participation this fall and beyond," because women are more likely to leave work to care for children compared to men, said Chicago Fed adviser Matthias Doepke.
At the same time, government payments have boosted the savings rate and asset prices have soared, making it a good time to retire. "From both the women's employment angle and the early retirement angle, low participation is likely to persist a while longer," Doepke said.
Stronger-than-expected inflation readings over the past few months have complicated the Fed's new outcome-based roadmap for setting interest rates, but the latest report on consumer prices offered some support to the thesis, held firmly by Fed Chair Jerome Powell, that the bulk of recent price rises will prove transitory.
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