Winds are changing for the US participation rate

The risks to our participation rate forecast are numerous and largely weighted to the downside, implying unemployment could fall further. The aging population, restrictive immigration policies, layoffs among federal workers, and a small pool of shadow labor supply suggest that labor market participation could be weaker than we expect.

What you will learn:

• We are comfortable that our baseline forecast is in line with long-run demographic projections, but the near-term outlook may need to be revised lower to reflect weaker prime-age participation than we assumed.
• According to the Oxford Economics Global Economic Model, a sustained decline in the participation rate will lead to a similar fall in the unemployment rate.
• A tighter labor market via a drop in the participation rate would put some upward pressure on nominal wage growth and, by extension, inflation. We don’t view the risk to inflation as significant, as long as trend productivity remains strong. Productivity growth will allow for a tight labor market without being a source of inflation.

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