The 2008-09 recession kicked off a long decline in the labor force participation rate, which many economists and policy makers wrote off as permanent damage.
In the later years of what became the longest expansion on record, participation began rising again as a strong economy drew people who hadn’t been searching for work into employment.
Strong demand eventually induced more supply. But today, the soft-landing forecast hinges on supply increasing despite weaker demand.
Robert Shimer, an economics professor at the University of Chicago, sees that as unlikely.
“Historically, whenever unemployment has risen by any substantial amount, it’s been because of a decrease in employment, not because of an increase in labor force participation,” he said.
Those in the soft-landing camp see more factors than just the receding pandemic risk drawing people back into the job hunt. One is the promise of higher pay, with wage growth running hot. There’s also inflation.
On the other hand, there’s the impact of long Covid to consider. An Aug. 24 report by Katie Bach, a senior fellow at the Brookings Institution, estimated that anywhere from 2 to 4 million Americans are out of work due to ongoing side effects, and suggested that number may grow over time if policy makers don’t take action to address the problem.
Economists at the banks that forecast a US recession -- like Aneta Markowska, the chief US financial economist at Jefferies in New York -- don’t see much scope for additional increases in participation.
That’s part of the reason why many of them see the Fed ultimately tightening more than investors anticipate: Policy makers may feel they have to bring labor demand down further if they don’t see labor supply increasing.
“You can push the participation rate up a little bit further, but there isn’t a huge amount of upside,” Markowska said. “There’s probably three to six more months of that. And then you’re just going to run out of people.”