The slow collapse of America's jobs market

Americans are dropping out of the jobs market, and fast. That’s the depressing takeaway from today’s non-farm payroll report.

The overall participation rate – a measure, essentially, of the proportion of people of working age either in a job or looking for one – has fallen to the lowest level since 1978. It is, as far as employment experts are concerned, a deeply worrying signal: increasingly, potential workers are giving up on getting work, dropping out of the jobs market instead of attempting to find a new position.


In fact, as you can see from the chart, participation has been falling since the turn of the millennium, though it’s only in the wake of the financial crisis that the drop has become more vertiginous.

Why be concerned about this? Well, a high participation rate has typically been seen as evidence of the American economy’s strength – a complement to its high productivity rate and consistently-strong GDP growth rate. A low participation rate, on the other hand, is often evident in economies which are more sclerotic and less efficient – particularly ones with over-generous welfare states which some think discourage people from working.

So, for instance, Japan and Spain both have participation rates below 60%: Germany’s has only just tipped fractionally above it.

The reality is that now, for the first time since 1977, America’s participation rate, at 63.3%, is lower than Britain’s, which is 63.6%, or was in the three months to the end of January.

Thanks to James Knightley of ING for this

It would be nice to claim that this was because Britain was in some way becoming leaner and meaner, but the statistics suggest otherwise: Britain’s participation rate has remained steady since 2005 while America’s has fallen sharply as people leave the workforce.

It might be odd, having said all of the above to say that today’s nasty US jobs report (the headline, by the way, was that a mere 88,000 net jobs were added in March – well below the rise in the population) also technically make it more likely that the Federal Reserve will scale back its stimulus. But in one sense they do. The Fed has committed to more quantitative easing, buying up $85bn of debt each month until the unemployment rate drops below 6.5%. But because unemployment measures the number of working people as a percentage of the total workforce, it can fall as a direct result of the workforce falling – and that’s what happened this time, with the rate dropping from 7.7% to 7.6%.

Now, pragmatically speaking the Fed will try to “look through” this optical illusion. But it’s an important reminder that when you tie your monetary policy to a very specific number, it doesn’t always make it easy to predict future moves from the central bank. Mark Carney, who is coming in as Bank of England Governor this summer and has nodded approvingly over at what the Fed has been doing, should take note.