I’ve written extensively about the participation rate, see: Understanding the Decline in the Participation Rate and Further Discussion on Labor Force Participation Rate.
In trying to forecast the change in the unemployment rate for 2013, it is important to forecast what will happen to the participation rate this year. The participation rate is the percentage of the working age population in the labor force. If more people join the workforce, then more jobs will be needed to push down the unemployment rate. However, if the participation rate stays flat in 2013 – or even declines further – then fewer jobs are needed to push down the unemployment rate.
Here is a repeat of a graph from the December employment report. The Labor Force Participation Rate was unchanged at 63.6% in December (blue line).
A key point: The recent decline in the participation rate was expected, and a large portion of the decline in the participation rate was due to changing demographics, as opposed to economic weakness.
The participation rate for prime working age women increased significantly from the mid 30s to the mid 70s and has mostly flattened out since then. The participation rate for women increased slightly in December to 74.5% and might increase a little in 2013.
The participation rate for prime working age men has been decreasing for decades – from the high 90s in the 1950s to just over 90% in 2005. In December, the participation rate for men increased slightly to 88.4% .
I still expect a little bounce back for both prime working age men and women – but not much.
There are other key demographic trends – younger people have been staying in school, so the participation rate for those under 25 has been falling – and older people have been staying in the work force longer, so the participation rate for older workers has been increasing.
Overall I’ve been expecting some small bounce back in the participation rate, but I don’t think any bounce back will be huge – and that means it will take fewer jobs than some expect to lower the unemployment rate in 2013. This remains a key number to watch.