Where Are the Workers?

As the Federal Reserve debates its monetary tightening timeline, the labor market is an important factor to watch in the year ahead, according to our Franklin Templeton Investment Solutions team. Read their thoughts on the labor market’s implications for both monetary policy and risk assets.

Where Are We Now?

In order to estimate the path forward for the Federal Reserve (Fed), risk assets, and the continued expansion of the United States (US) economy, it is first important to understand the path forward for labor force participation. Looking over the coming months, the number of workers returning to the labor force will determine how many job openings can be filled and how quickly wage growth will retreat from its lofty levels. Wage inflation, a symptom of an otherwise tight labor market, bleeds into corporate earnings and our outlook for risk assets. Here, we’ll explore the various contributing factors to the participation rate, what we can expect going forward, and implications for both the Fed and risk assets.

As the US workforce continues its path toward recovery from the COVID-19 pandemic, we find ourselves in an economy with spiking wage inflation, an abundance of unfilled jobs, and a Fed that is still noticeably accommodative. These metrics are all at least partially caused by slack in the labor force participation rate (the percent of the population neither currently employed nor actively seeking work). Though the US unemployment rate has improved to 4.2% as of November 2021, we have often seen the participation rate’s recovery lag that of the unemployment rate over previous cycles.

Even prior to the COVID-19 outbreak in early 2020, the labor force participation rate in the United States had been in a structural downtrend for decades. However, the pandemic brought about a significant drop below the historic trend, with limited signs of recovery over the past 20 months (see Exhibit 1).

Exhibit 1: Labor Force Participation Remains Subdued