Fed Economist Challenges the Idea a Tight Job Market Pulls In Workers

(Bloomberg) -- Contrary to a widespread view among economists, the tight U.S. labor market is not attracting new workers from the sidelines, according to new research from the Federal Reserve Bank of San Francisco.

The participation rate among prime-aged workers, those between the ages of 25 and 55, has significantly increased in recent years after dropping off during and after the Great Recession. Some argue the elevated level reflects new workers entering the labor force as higher wages and plentiful job openings lure Americans into the tight labor market.

However, Regis Barnichon, a research adviser at the San Francisco Fed, found the recent increase is not driven by an inflow of new workers. Instead, it’s propelled by fewer workers leaving the labor force.

“Rather than drawing new people in, the hot labor market has instead reduced the number of individuals who are dropping out,” Barnichon wrote in research published Monday. “Because unemployed workers are finding jobs faster, they are less likely to leave the labor force.”

Barnichon analyzed flows of prime-aged workers into and out of the labor force from 1976 to 2018. He found the inflow probability remained largely flat over the past three years, suggesting the tight labor market is not attracting new workers from the sidelines.

At the same time, the slowdown in Americans leaving the job market has increasingly contributed to a growing overall prime-age participation rate since about 2011. The trend of unemployed workers finding jobs faster and thus becoming less likely to leave the labor force reflects a similar pattern seen in the late 1990s.

To contact the reporter on this story: Reade Pickert in Washington at epickert@bloomberg.net

To contact the editors responsible for this story: Scott Lanman at slanman@bloomberg.net, Alister Bull, Sarah McGregor

©2019 Bloomberg L.P.