US – Supply factors are driving down participation rate (demographics and increased incentives to drop out), not weak labor market demand writes BofA

[Bank of America’s analysis] contradicts the notion that a declining labor‐force participation rate reflects a weak economy because of weak labor demand. Labor demand is very strong relative to labor supply. Supply bottlenecks and wage pressures are in the early stage of picking up. That’s why businesses’ main complaint is the difficulty of finding qualified workers. A rapidly declining unemployment rate is a sure sign the labor market is tightening as it normally does in an expansion that is about to turn five years old.

Labor‐supply factors are behind the long‐term decline in the participation rate, which peaked about the time of the Y2K bubble. Since then, female participation has been drifting lower as the benefits to two‐income households have been eroded by tax laws and rising‐childcare costs. Just this past week, the PBS News Hour dramatically documented the negative impact of rising child‐care costs on mothers’ labor‐force participation rates. Young people are staying in school longer because of the big premium on the lifetime earnings of college graduates. Most significantly, the baby boomers are moving into retirement, which is by far the biggest factor behind the downtrend in Exhibit 8. Notice that before the baby boom began to enter the workforce and female participation started to rise, that is, before about 1965, the participation rate was substantially lower than it is today. Despite the much lower participation rate of the earlier era, economic growth was quite healthy. Instead of “irrational pessimism,” there was a much more positive economic mood coming out of World War II and the Great Depression.