US: Don't expect a rebound in the participation rate

The participation rate has declined rapidly based on the Great Recession. Since January 2009, the participation rate has declined from 65.8 to 62.4 in October 2015, i.e. fallen 3.4pp in total. It is tempting to ascribe this to the downturn in growth but this conclusion would be wrong, in our view.
We estimate that close to half of the decline in the participation rate is due to demographics, in particular the retirement of the Baby Boomer generation. The impact of cyclical forces is currently small (-0.4pp), while there is a larger unexplained residual (-1.4pp) which may be temporary or structural in nature.
Historical high duration of unemployment could be a part of the explanation behind the residual drop, as longer-term unemployed people could be discouraged and eventually drop out of the labour force. This could indicate structural damage from the Great Recession.
Looking forward, the aging of the workforce will continue to be a headwind for the participation rate over the next 10 years. Although we factor in a decline in both the cyclical and residual component over the coming two years, it will only just cancel out the downward pressure from the aging effect. Hence, we expect the participation rate to be roughly stable in the near term before trending lower again.
Our calculations suggest that trend growth in the labour force is around 150,000 per month in the next couple of years. In 2015 so far, employment growth has been around 200,000 per month, which implies that employment growth has to slow significantly before it will become a concern for the Fed.

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