U.S. Jobs Report: What’s Behind the Uptick in Labor Participation?

Today’s U.S. labor market report solidified market expectations that the Federal Reserve will raise the fed funds rate by 25 basis points at its two-day meeting next week.

February’s payroll gains were solid at 235,000, boosting the three-month moving average to 200,000 per month, up from the 150,000 average in December. To be sure, a few one-off factors supported job gains in February: Unseasonably warm weather contributed to the biggest gain in construction payrolls since the housing boom before the 2008 financial crisis, and the volatile education services sector recorded a surprising 30,000 rise. But even after adjusting for these factors, today’s report was still solid compared with the 70,000–120,000 range of payroll gains needed to sustain labor force growth when the economy is at full employment.

Moreover, the current 4.7% unemployment rate is consistent with the Federal Open Market Committee’s (FOMC) median projection for the end of 2017, and positive revisions to average hourly earnings boosted the year-over-year rate of wage inflation to 2.8%, up from 2.5% in January – factors that strengthen the case for additional fed funds rate hikes.

Labor force participation keeps ticking up

What was perhaps more interesting to us about today’s report, however, was the labor force participation rate: Participation ticked 0.1 percentage point (ppt) higher in February, to 63.0%, and is now 0.4 ppt higher than in November 2016 and 0.6 ppt higher than in September 2015 (when the rate troughed at 62.4%).

We’ve been surprised to see these post-election labor force gains. As we stated in an early November blog post, the increase in the labor force for the better part of 2016 resulted primarily from a decline in long-term unemployed individuals dropping out of the labor market, rather than the return of previously discouraged individuals. The historically low labor force dropout rates, coupled with a still low probability of these long-term unemployed individuals gaining work, led us to believe labor force gains had largely run their course and that the participation rate would begin to trend lower as a result of demographic and other secular trends.