Recent U.S. Labor Force Dynamics: Reversible or not?

IMF Working Papers, April 2, 2015

Source details

The U.S. labor force participation rate (LFPR) fell dramatically following the Great Recession and has yet to start recovering.
Central question: how much of the post-2007 decline in LFPR is reversible.

While around ¼–? of the post-2007 decline is reversible, the LFPR will continue to decline given population aging.
The paper’s measure of the “employment gap” suggests that labor market slack remains and will only decline gradually.
Given continued downward pressure on the LFPR, labor supply measures will be an essential component of the strategy to boost potential growth.
Stimulatory macroeconomic and labor supply policies should help reduce the scope for further hysteresis effects (e.g., loss of skills, discouragement).

The employment gap measure indicates persistent slack in labor markets.
Slower decline of the employment gap implies a still important role for stimulative macro-economic policies to help reach full employment.

Use stimulative macroeconomic policies to help reduce labor market slack and move toward full employment.
Implement labor supply measures to counteract downward pressure on the LFPR and support potential growth.
Apply both macroeconomic stimulus and labor supply policies to limit hysteresis effects such as loss of skills and worker discouragement.

Source: IMF Working Papers — "Recent U.S. Labor Force Dynamics: Reversible or not?"