The FT’s Robin Harding and Sarah O’Conner take a look at the US and UK labour markets in the FT today, noting that for the first time in 36 years, the UK has a higher labour force participation rate (proportion of people over the age of 16 that actively want a job) than the US.
The FT’s take is that this trend is down to one particular group: workers aged 25-34.
In the UK, the participation rate for 25-34 year olds has risen to 85.4% in the last few years. In the US, its fallen to 81.8%.
The FT cites a few reasons, including
- recent welfare reforms on the UK pushing people back into the labour market;
- young, non-college educated males struggling to find jobs in the US; and
- retiring baby-boomers in the US (who tend to be slightly older than in the UK).
Why does this matter?
Well, the participation rate, coupled with the unemployment rate, provide a sense of spare capacity in the economy:
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 would also 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.
So although both the Bank of England and, to an extent the Fed, have moved away from targeting the unemployment rate in their forward guidance, economists at both Central Banks will be keeping a close eye on what changes to labour market participation rates might mean about when interest rates could begin to rise.
