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Worker participation rate may lag for years, Fed study says

SAN FRANCISCO — Workers who have dropped out of the labor force may take a few years to begin searching for work, Federal Reserve economists say in a paper offering insights into the health of a labor market that's key to central bank policy.

"In the current recovery, it will probably take a few years before cyclical components put significant upward pressure on the participation rate because payroll employment is still well below its pre-recession peak," Leila Bengali, Mary Daly and Rob Valletta said in a report released Monday by the San Francisco Fed.

Economists have debated how much a slump in labor force participation stems from temporary effects such as weak economic growth or from more lasting forces like an aging workforce. Participation is a key variable influencing the jobless rate, which Fed officials are monitoring to gauge the appropriate level of stimulus.

Vice Chairwoman Janet Yellen said in March that a decline in unemployment reflecting job seekers exiting the workforce may understate "the actual degree of labor market slack." That's why the Federal Open Market Committee is keeping an eye on a "broad range" of indicators to assess the state of U.S. employment, she said.

Labor force participation held at 63.3 percent in April for a second month, matching the lowest level since May 1979.

"We find evidence, reinforcing other research, that the recent decline in participation likely has a substantial cyclical component," said the researchers. "States that saw larger declines in employment generally saw larger declines in participation."

Bengali, Daly and Valletta found that the relationship between employment and participation has so far been weak in the recovery that started in 2009, with payrolls yet to approach their pre-recession peak.

"In the recoveries from the 1981-82 and 1990-91 recessions, the positive relationship did not emerge until the economy had passed the previous employment peak by a substantial margin," they said. "We may not be deep enough into the current recovery for the typical positive relationship between participation and employment growth to emerge."

Worker participation rate may lag for years, Fed study says 05/13/13 [Last modified: Monday, May 13, 2013 7:43pm]
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