The details of the U.S. employment report for February encouraged speculation that the participation rate could rise enough to stop the uptrend in inflation even if employment growth remains strong. We see no sign of that scenario, however, even with the participation rate rising 0.3 points in February.
Within the participation rate, the “prime-age” part—covering those aged 25 through 54—has been trending up, which is a positive development. The uptrend is consistent with some of the decline in the overall participation rate in the past decade being cyclical rather than secular. However, even with the uptrend, the overall participation rate has been close to flat for the last four years, as we illustrate in our charts. The pattern highlights the ongoing secular downtrend related to the aging of the population, which is reducing the overall participation rate by an estimated 0.25 points per year.
We expect the participation rate to remain close to flat in the year ahead, with some cyclical recovery temporarily offsetting the secular downtrend. Meanwhile, the working-age population is growing at about a 1%-per-year pace, so a flat participation rate is consistent with the labor force growing at about a 1% rate as well. In turn, the unemployment rate is likely to keep falling unless employment growth suddenly slows to about a 1% pace. A 1% pace for payrolls equates to just 123K per month. In other words, it only takes monthly gains in payrolls over 123K to keep the unemployment rate trending down.