Taking Stock: the absent workers

This week we will look more closely at the oddity discussed in last week’s Taking Stock commentary: how does near record-low unemployment in the U.S. square with a slowing economy? 

For those short of time, the answer is (probably) to be found in the reduction in labour participation since the outbreak of Covid in 2020. The pandemic added new elements to an existing problem, that began twenty years earlier as baby-boomers began leaving the workforce, ahead of the official retirement age. 

But first a look at last week’s news, which barely moved stock markets. The economic data was reassuring for the Fed, as it engineers a slowing of U.S. economic growth, without breaking too much along the way. 

A reassuring week for the Fed

April headline and core inflation both fell, as did producer price inflation (back to January 2021 levels). A rise seen in unemployment numbers was reported. This data appeared to justify the Fed’s hike in interest rates last Wednesday, to a target range of 5% to 5.25%, as expected. 

Chair Jay Powell implied that interest rate hikes are now on pause (but did not explicitly say so). He again explicitly referenced the tightening of financial conditions caused by the financial crisis and the on-going quantitative tightening program, as a reminder that other factors are also at work, beside interest rates, helping to curb credit growth. The market continues to price in rate cuts by the end of the year. 

Again, one wonders if there is a compromise at work, whereby the Fed is prepared to be a little easier on inflation if it means fewer breakages in the financial system? Or, as some argue, the opposite case. Does Powell risk running an over-tight monetary policy, one that will kill the economy as well as inflation, and risks financial instability? Both views have been discussed in recent Market Commentaries.

Treasury yields fell slightly over the week.


Global stock markets appear relatively settled. Investors are waiting to see how the Fed and other central banks cope with the trilemma of squeezing inflation while avoiding recession, while ensuring highly leveraged parts of the economy do not break under the strain of high interest rates. 

Long-term investors should remain diversified in a multi-asset portfolio, that financial history shows will maximise returns per unit of risk (volatility) taken.

Absent workers

It is unusual that after more than a year of sharp interest rate hikes that have taken the Fed funds rate from near zero to over 5%, demand for labour remains so strong. This is happening even as demand growth is slowing, as witnessed by the first quarter GDP growth of 1.1% annualised.  

The April unemployment rate of 3.4%, down from 3.5% in March, is the same level as reported in January. Prior to that, it was last seen in…May 1969. 

What is behind this tight labour market, even as the economy slows? The answer is a smaller workforce as a proportion of 15- to 64-year-olds. Having reached a high of 67%, the U.S. labour participation rate* has been falling since the start of the 2000’s. 

An ageing working population undoubtedly contributed to this, as illness and early retirement has affected the baby-boom 55 to 64 age cohort. 

The participation rate appeared to plateau in the years prior to Covid at around 63.5%, before dipping to an appeared  low of 60% in spring 2020 with the Covid pandemic. In April it had recovered, partially, to 62.6%. Why the 0.9% gap compared to pre-Covid? (Representing approximately 200,000 workers). 

The most cited study on this phenomenon is by the Chicago Fed, from February 2022.** It found, simply, that workers want to work fewer hours. The report suggests that the key reasons for this are to care for family members, fear of contracting Covid and increased unemployment benefits. 

The desire to work less is particularly strong amongst those with reduced ability to work from home, and lower in the social scale. The study explicitly downplays the cost of childcare, which is in contrast to similar studies in the UK.

A year on from the Chicago Fed study, we are probably seeing less fear of Covid but an increase in long-term sickness amongst workers (as has been found in the UK and elsewhere). In December 2022, 1.5 million American workers took sick absence from work, the last time the monthly figure was below 1 million was December 2019. Symptoms of long-Covid were widely reported. A rise in other long-term illnesses, caused by delays to diagnosis and treatment during the Covid lockdowns, has been found in the UK and elsewhere, and is likely a factor in the U.S.

One can assume that, over time, the Covid-era factors will fade. But the long-term aging of the workforce will continue to weigh on the participation rate. In addition, we know that temporary voluntary absenteeism from the labour market often leads to a permanent withdrawal.

The share of a companies’ revenues going to wages is likely to increase, and that going to shareholders dividends will fall. But in so much as income from wages is spent faster than dividend income, the effect maybe a growing economic pie for all to enjoy. 

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  1. No Investment Advice: This financial commentary is for informational purposes only and is not intended to be, and should not be, construed as an offer to sell or a solicitation of an offer to buy any security or financial instrument or invest in any equity or investment strategy. It should not be used to form the basis of any investment decision. 
  2. Investment Risks: There are risks associated with investing in securities and past performance is not indicative of future results.  Always seek professional advice before investing. 
  3. Not Legal/Tax Advice: This financial commentary is not intended to be, and should not be construed as, legal, regulatory, tax, or accounting advice. Always seek professional advice and consult with your legal counsel, tax and accounting advisors when contemplating any course of action.

Source Material:

* Calculated by adding those in employment to those unemployed but looking for work, as a percentage of the working-age population (defined as all those of 15 to 64 years). See: United States Labor Force Participation Rate – April 2023 Data – 1948-2022 Historical (tradingeconomics.com)

**Has the Willingness to Work Fallen During the Covid Pandemic? – Federal Reserve Bank of Chicago (chicagofed.org)

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