By Sarah O’Connor in London and Robin Harding in Washington
©Bloomberg
US job seekers wait to speak to potential employers at a job fair
The US is losing its edge as an employment powerhouse, where most people have a job or are looking for one, after its labour participation rate fell behind the UK’s
The diverging trends between the US and the UK come as central bankers in both countries try to understand the dynamics in their respective labour markets, a critical factor in how long they should keep interest rates at record lows.
The labour force participation rate – the proportion of adults who are either working or looking for work – started to decline in the US in 2000 and has plunged since 2008 from 66 to 63 per cent.
The equivalent of 7.4m people are no longer part of the labour force. Yet participation in the UK has held up remarkably well despite the country’s prolonged downturn and now stands at 63.6 per cent – the first time in 36 years that it has been higher than the US rate.
Economists have been surprised by the trends, not least because the US labour market has long been seen as one of the most resilient and flexible.
“America is even more flexible than us and yet there is this complete contrast,” said Paul Gregg, economics professor at the UK’s Bath university.
Gary Burtless, a senior fellow at the Brookings Institution think-tank in Washington, said the US used to stand out among rich countries for its high labour force participation but that was no longer the case.
“The US used to have a reputation for being very hard working,” he said. There are no definitive answers yet as to why the labour markets have behaved so differently.
US economists have calculated that between a half and two-thirds of the fall in participation reflects the retirement of America’s baby boomers.
The UK comparison is interesting because it has similar demographics, although its baby boomers are a little younger. The greatest divergence between the US and UK seems to be among prime age workers.
For example, among 25-34 year olds, UK participation is up from 84.3 per cent to 85.4 per cent between 2007 and 2013. Over the same period in the US, participation fell from 83.3 per cent to 81.8 per cent.
For the US, participation is crucial for monetary and fiscal policy because it affects the amount of spare capacity in the economy.
If some of the people who have left the workforce will get jobs in the future then the unemployment rate, currently 6.7 per cent, is understating spare capacity. That would mean the Federal Reserve can keep interest rates low for longer than it otherwise would. It wouldalso imply potential growth and long-term tax revenues are higher. For the UK, the flipside of robust participation and employment has been bad wage growth and productivity.
If the decline in workers’ productivity proves to have been only temporary, the Bank of England can afford to wait for longer before it raises interest rates. But if it is permanent, the economy might soon reach full capacity.
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