America’s Job Market Has Some Upside as Disabled Workers Return

(Bloomberg) -- Whether would-be workers linger on the U.S. labor market’s sidelines is a key question: it will determine how fast the country’s economy can grow, how fast wages might rise, and, potentially, how patient the Federal Reserve can afford to be with rate increases.

It’s also incredibly hard to answer.

Some commentators take in America’s 4 percent unemployment, elevated job openings and gradually rising wage gains and declare victory over labor slack. Others observe a prime-age employment rate that is lingering well below historical highs and see further room for improvement. Fed Chairman Jerome Powell talked about the dynamics extensively while speaking before the Senate Banking Committee Tuesday, saying at one point that as people return to -- or stay in -- the job market, "we have learned this year that there’s more slack.”

Still, Powell warned again and again that monetary policy and a strong economy can do only so much to bring potential workers back. At some point, policy changes are needed to eliminate disincentives and drive people to punch the clock. Goldman Sachs Group Inc. economists could offer the Fed Chair some comfort.

David Choi and his colleagues dig into a recent increase in labor force participation -- the share of people working or looking out of the working age population has marched up 0.5 percentage points to 63.2 percent over the past year -- and find that about 40 percent of it came from a decline in workers saying that they are disabled.

America’s Job Market Has Some Upside as Disabled Workers Return

Some of that could owe to a tight labor market. But demographic changes, increased stringency when it comes to getting the benefit, closures of Social Security Administration offices, and increased access to medical care from the Affordable Care Act might also be driving people back to the workforce, Choi writes for the team in a note published last week. And it’s possible that the shift hasn’t yet exhausted itself.

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“Our analysis points to some upside risk to the participation rate if policy-related factors continue to push the share of disabled workers lower,” according to the note. A continuation of the current trend would boost participation by as much as 0.15 percentage point each year. If they assume that the trend continues for two years before fading out, it could bring as much as a 0.5 percentage point boost to job and output growth over three years.

Aging is likely to ultimately outweigh the short-term bump, and the participation rate will fall off again. But for now, more workers may be around for hiring. For further detail on how the participation rate is evolving and why, you can check out the Atlanta Fed’s recently updated tracker, which breaks down exactly what is happening with labor force attachment in different demographics.

More on Participation Changes: 

Compositional changes behind the growth in euro area employment during the recovery (August 2018)
Structural change -- pension reforms -- and higher education levels are also a tailwind for participation in the euro area, based on this European Central Bank analysis. Labor force involvement for 55- to 74-year-olds is up considerably. 

The Problem of US Labor Force Participation (January 2019)

In the wake of the 2007-2009 crisis, labor force participation came in weak in the U.S. even though the nation’s economic growth outstripped that of many advanced economies in Europe and Asia. This Peterson Institute for International Economics study attributes the trend among U.S. men in part to structural changes, since it’s common across countries, but points to rising disability as a big drag on women’s participation. 

Trends in Social Security Disability Insurance Enrollment (November 2018)

The Congressional Research Service says that the fact that Generation X (a small group) is about to enter prime disability-claiming years could lower enrollment, among other factors. 

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