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International Monetary Fund. Western Hemisphere Dept.
This Selected Issues paper on the United States of America examines the recent US labor force penetration rate (LFPR) dynamics. LFPR dynamics can be driven by structural factors and cyclical ones related to job prospects. With participation rates for older workers lower than for prime age workers, demographic models suggest that aging of the baby boom generation explains about 50 percent of the near 3p.p. LFPR decline during 2007–2013. State-level panel regression analysis is used to tie down the cyclical effect, which is estimated to account for about 30–40 percent of the decline. Significant remaining slack in the labor market points to an important role for macroeconomic and labor supply policies. This suggests a still important role for stimulative macroeconomic policies to help reach full employment. Macroeconomic policy should remain accommodative for a while given sizeable labor market slack. This slack goes beyond that signaled by the unemployment rate and takes account of the LFPR being below trend and many employees working part time ‘involuntarily’.
Mr. Ravi Balakrishnan, Mai Dao, Mr. Juan Sole, and Jeremy Zook
The U.S. labor force participation rate (LFPR) fell dramatically following the Great Recession and has yet to start recovering. A key question is how much of the post-2007 decline is reversible, something which is central to the policy debate. The key finding of this paper is that while around ¼–? of the post-2007 decline is reversible, the LFPR will continue to decline given population aging. This paper’s measure of the “employment gap” also suggests that labor market slack remains and will only decline gradually, pointing to a still important role for stimulative macro-economic policies to help reach full employment. In addition, given the continued downward pressure on the LFPR, labor supply measures will be an essential component of the strategy to boost potential growth. Finally, stimulative macroeconomic and labor supply policies should also help reduce the scope for further hysteresis effects to develop (e.g., loss of skills, discouragement).
International Monetary Fund. Western Hemisphere Dept.
Focus. The 2014 Article IV Consultation focused on five broad themes to strengthen the recovery and improve the long-term outlook: raising productivity growth and labor force participation, confronting poverty, keeping public debt on a sustained downward path, smoothly managing the exit from zero policy rates, and securing a safer financial system. Main policy issues. • Policies are needed to boost longer-term potential output through investments in infrastructure, raising educational outcomes, improving the tax structure, and developing and expanding a skilled labor force (including through immigration reform, job training, and providing childcare assistance for working families). • Forging agreement on a credible, medium-term consolidation plan should be a high priority and include steps to lower the growth of health care costs, reform social security, and increase revenues. In the absence of such a comprehensive agreement, efforts should still focus on identifying more modest opportunities to relax the near- term budget envelope, paid for with future fiscal savings. • An enduring consequence of the past recession has been a jump in the number of families living in poverty. Improved employment prospects and economic growth will be essential to reverse this upward movement. An expansion of the Earned Income Tax Credit and an increase in the minimum wage should also be part of the solution. • The goal for monetary policy is to manage the exit from zero interest rates in a manner that allows the economy to converge to full employment with stable prices while avoiding financial instability and negative spillovers to the global economy. This is a complex undertaking. To facilitate it, steps could be taken to expand the Fed’s communications toolkit so as to provide greater clarity on how the Federal Open Market Committee assesses progress toward its longer-run goals. • Continued regulatory oversight is needed to counter the emergence of financial imbalances, particularly those that may be growing outside of the banking system. Policies should also be deployed to keep mortgage credit accessible and attract more private capital into housing finance while minimizing risks to taxpayers. • The U.S. external position is assessed to be broadly consistent with medium-term fundamentals and desirable policies.
International Monetary Fund. Western Hemisphere Dept.

Recent Us Labor Force Participation Dynamics: Reversible or Not? 1 A. Introduction 1. The U.S. labor force participation rate (LFPR) fell dramatically following the Great Recession and has yet to start recovering ( Figure 1 ). Indeed, the current LFPR of 62.8 percent is the lowest rate since 1978. Taking a longer view of LFPR dynamics yields some important background to the recent decline ( Figure 2 ). In particular, the LFPR increased sharply from just below 60 percent in the early 60s to above 66 percent by 1990, largely reflecting the baby boom

Mr. Ravi Balakrishnan, Mai Dao, Mr. Juan Sole, and Jeremy Zook

I. Introduction The U.S. labor force participation rate (LFPR) fell dramatically following the Great Recession and has yet to start recovering ( Figure 1 ). Indeed, the current LFPR of 62.8 percent is around the lowest rate since 1978. Taking a longer view of LFPR dynamics yields some important background to the recent decline ( Figure 2 ). In particular, the LFPR increased sharply from just below 60 percent in the early 60s to above 66 percent by 1990, largely reflecting the baby boom generation (especially women) entering the labor force. Over the 1990s

International Monetary Fund. Western Hemisphere Dept.

-time high at 67.3 percent in 2000) and subsequently entered a secular decline (following the 2001 recession). This downward movement accelerated following the global financial crisis. Labor Force Participation Rate (percent) Sources: Bureau of Labor Statistics, Haver Analytics; IMF staff estimates. LFPR dynamics are a complex combination of both structural factors (population aging or delayed retirement) and cyclical factors (largely related to the availability of jobs). Staff’s demographic models suggest that aging explains around 50 percent of the LFPR