Redefining the Labor Market

SF Fed economists Rob Valletta, Nicolas Petrosky-Nadeau, and Mary C. Daly share their thoughts on the U.S. labor market with fellow economist President John Williams (video, 6:06).

Changes in demographics, and in employer and worker needs, have redefined the U.S. labor market. We discuss the "new normal" in our 2015 annual report, What We've Learned…and why it matters. Observations include how the gig economy—or sharing economy—is affecting the part-time workforce. We also look at influences on labor force participation rates and clarify the math behind sluggish wage growth. A consideration for both is the retirement of higher-earning baby boomers and the increase in steady employment for lower-wage workers.


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John Williams:

We saw a huge increase in part-time, or involuntary part-time work, during the recession and early parts of the recovery because of the weakness in the economy. Employers didn't have as much work for their employees to do. But, now as the economy has improved, we're seeing some structural shifts in the labor market and the economy also play out in terms of affecting these numbers. Is there a way that the gig economy, and how people are working part-time in the new parts of the economy is going to affect the structure of the labor market?

Rob Valletta:

The gig economy certainly has its upsides, because given these kinds of desires that employers have for flexibility, one way that workers can fill in—people who want to work full-time—they can fill in their hours and get to a full-time schedule through these kinds of flexible options like ride sharing services and so on. The flip side of growing part-time work, is that at the same time, workers are also finding it necessary to try to find these kinds of gigs where they can fill in the hours that are not being provided to them.

As the labor market has improved, we've seen a reduction in the number of people who are working part-time, but say they want full-time work. Now that surged during the Great Recession to unprecedented levels. That is an indication of how weak the labor market was during the Great Recession and the immediate aftermath. The subsequent improvement has pretty much been in lock step with the overall improvement in labor market conditions. However, there is still an unusually high number of people who are working part-time involuntarily—those who say they want full-time work—and that appears to reflect some relatively permanent changes in the labor market.

John Williams:

Today the labor force participation rate is well below what it was before the recession started. What's going on with these people? Why are they not either working or looking for work? How do you see that changing over time?

Nicolas Petrosky-Nadeau:

At any point in time, labor force participation is determined by how well the economy is doing, and what people want to do with their time. At this point in time, we can say that labor force participation is being held back by long-term changes in the labor market, and not the lingering effects of the recession. The silver tsunami of retiring baby boomers is a perfect example of this. As the Baby Boomer Generation retires, we have fewer people looking for work or working. That naturally pushes the participation rate down, but that's not the whole story.

We've looked into the data, and it appears that participation rates are declining for other age groups. For example, if we look at individuals who are of working age, most of the decline in participation rates that we see are taking place in households of middle- to high-incomes. This has been part of a trend that goes back over a decade.

John Williams:

Does this mean that as the economy continues to improve, that you're expecting people maybe to come back into the labor force and start working again? Or do you think that basically labor force participation is going to stay where it is?

Nicolas Petrosky-Nadeau:

To oversimplify a bit, people in higher income households have more flexibility. One person can go to work while the other goes to school, takes care of children or other household family members. What we've seen in the recent decades is a decline in the fraction of households with multiple earners. That tells us that, in all likelihood, individuals in higher income households are moving more towards the life of the work-life balance. If this is true, we're unlikely to see participation rates rebound as the economy keeps improving.

John Williams:

Normally as the economy improves and unemployment comes down so low, we would expect to see wages pick up. Why haven't we seen the normal increase in wages in the economy of late?

Mary C. Daly:

We actually have a math problem, not a wage problem. The math problem goes something like this: Essentially, during the recession, large numbers of low-wage workers were laid off, lost their jobs, or fired. Because so many low-wage workers lost their jobs, the average wage in the U.S. rose. It was sort of an artificial boost to wage growth that didn't reflect the strength of the labor market, and in fact, was giving us a false signal about how good things were then. As the economy has recovered, the reverse has occurred. What's happening now is, as the labor market improves, lots of low-wage workers who were displaced, sitting on the sidelines, waiting for the economy to improve, came back into the labor force. As they get jobs, that's a good thing, but they have lower wages. That pulls down the average wage in the U.S. Essentially we've got lots of low-wage workers coming in and slowing wage growth now, and we had lots of low-wage workers exiting and raising wage growth earlier.

John Williams:

What are other changes in the labor market or the economy, like demographics, that are affecting wage growth?

Mary C. Daly:

The retirement of the baby boom is a really important factor in what we're seeing in wage growth right now. As workers who are at the peak of their earnings—really retirees—are leaving the labor force and going off into retirement, it pulls down the average wage in the United States because these high-wage workers are leaving and the average falls.

John Williams:

With all the changes going on in the labor market, demographics and all the other things, what's the new normal for wage growth? What kind of wage growth should we be expecting to see in the economy over the next few years?

Mary C. Daly:

It's going to be slower, in all likelihood, than we usually see. On average, wage growth is productivity growth plus inflation. But, right now we have slow productivity growth, low inflation, and then we have these demographic and other compositional changes that are all going to put downward pressure on wage growth going forward. Instead of seeing something like 3.5 to 4 percent and thinking that's normal, we're going to be looking for something like 3 to 3.5 percent and saying that's reflective of a healthy economy.


Involuntary Part-Time Work: Here to Stay?

Changes in Labor Participation and Household Income

What's Up with Wage Growth?

Why Is Wage Growth So Slow?

An Overview of Our 2015 Annual Report

China in the Global Economy

The Fed's Balance Sheet

The Future of Cash

Regional Influences on Monetary Policy

Transforming Financial Services

Technology for Today’s Fed

Becoming a Destination Employer

Creative Placemaking

Health and Prosperity

The Fragility of Finances

2015 Annual Report: President's Letter