An Improving Labor Market?
Fed Chairman Janet Yellen paints a rosy picture of a robust labor market that “is attracting people from outside the labor force back into employment.” Indeed, in her latest press conference, Ms. Yellen — pointing to the uptick in the labor force as an indication that monetary policy was working — went on to say that “[c]onditions in the labor market are strengthening, and we expect that to continue.” Yet, under closer scrutiny, this explanation does not hold up.
The chart shows the three-month moving averages of net labor force entries (blue line) and net labor force exits (red line, shown inverted). Net labor force entries, comprised of people entering the labor force as either employed or unemployed workers, has declined since early 2015 and, despite its latest uptick, remains far below last year’s levels. Meanwhile, net labor force exits has decreased sharply from its August 2015 high, driven mostly by fewer unemployed people leaving the labor force rather than employed people exiting (not shown).
This means that the labor force participation rate has ticked up lately, not because improving labor conditions are attracting more people back into the labor force, but because fewer people have given up their job search in recent months as compared to earlier years.
Our recent analysis takes an in-depth look at where we are in the employment cycle, which has implications for the broader economy. And while a recession is not likely this year, a review of ECRI’s leading indexes helps gauge recessions risks for the coming year.