Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / Why the Labor Force Drop Is a Structural Crisis
Transcript
- Lucas: Luna, I want to start with a number that I keep coming back to: the labor force participation rate just dropped to its lowest level in fifty years, outside of the pandemic period. We're talking about a rate that's now below sixty-two and a half percent. Luna: That's staggering. Especially because the headline unemployment rate actually ticked down to four point two percent last month. So on the surface, the job market looks healthy. But underneath, people are just… leaving. Lucas: Exactly. The participation rate has been trending down for decades, but the pace of the decline since 2020 is really striking. We lost about two million workers during the pandemic who never came back. And the latest data — for June 2026 — shows it's still falling. Luna: Right. And it's not just retirees. There's a bunch of forces here: long Covid, early retirement, but also a real mismatch between the skills employers want and what workers have. The JOLTS data last month showed job openings actually rose — to over seven point five million — even as participation fell. Lucas: That mismatch is key. We've got seven and a half million openings, but only about six million unemployed people actively looking. The ratio is still above one point two openings per job seeker. Normally, that would pull people off the sidelines — higher wages, signing bonuses, more training. But it's not happening at the same scale. Luna: So what gives? Are wages not rising enough? Or is it something deeper? Lucas: Average hourly earnings are up to thirty-seven sixty an hour, so wages are rising — about four percent year over year. But real wage growth after inflation is much thinner. Core PCE is running at two point seven percent. So real wages are up maybe one point three percent. That's not nothing, but it's not transformative. Luna: And for a lot of people, the cost of child care, or health insurance, or just the hassle of commuting — it may not be worth it. Especially if they have some savings or a spouse's income. Lucas: That's the structural story. A lot of the workers who left are older — early retirement accelerated during the pandemic and never reversed. But there's also a significant number of prime-age workers, especially women, who stepped out because of caregiving burdens that never fully eased. Luna: And long Covid is a real factor here too. The CDC estimates that something like one in five adults who had Covid still have lingering symptoms. That's millions of people who may not be able to work full-time, or at all. Lucas: That's the part that I think the Fed is really wrestling with. Because if the participation rate is permanently lower, that means the economy's potential output — its capacity to grow without overheating — is also lower. The Congressional Budget Office just revised down its estimate of potential GDP growth for the next decade. Luna: And that has huge implications for inflation. If the supply side of the economy is smaller, then even moderate demand can push prices up. That's exactly the scenario where the Fed stays on hold even as growth slows. Lucas: Right. The fed funds rate is at three point six three percent right now, and the market is pricing in a cut maybe later this year. But if the participation rate keeps falling, the Fed might have to keep rates higher for longer to keep inflation from reaccelerating. Luna: It's a brutal trade-off. You want to help the labor market, but you can't create workers you don't have. And monetary policy can't fix a structural labor supply problem. Lucas: That's what makes this episode of The Macro Memo so important, I think. We're not talking about a cyclical blip. This is a structural shift that will shape policy for years. And honestly, it's the kind of topic that — Lucas: — that reminds me why we do this show. We try to cut through the noise and get at what actually matters. And if walking through the economy with us has made something click for you, we want to keep doing it. A couple of dollars a month is genuinely what keeps these episodes going — buy me a coffee dot com slash fexingo, if you've gotten something out of them. Luna: Yeah, it really does make a difference. Every bit helps us stay ad-free and focused on the substance. Lucas: So back to the numbers. One more data point I want to highlight: real GDP growth in the first quarter was annualized at two point one percent. That's not bad, but it's below the three percent or so we saw in 2023 and 2024. So growth is slowing, even as the labor market tightens in this weird way. Luna: And the 10-year breakeven inflation rate is at two point two six percent — basically unchanged. The market isn't expecting a big inflation breakout, but it's not pricing in deflation either. It's like the bond market agrees: this is a low-growth, sticky-inflation world. Lucas: Exactly. And the yield curve is no longer inverted — the 2-year is at three point seven three, the 10-year at four point six one. That's a normal curve again. But it's not signaling a booming economy. It's signaling that the Fed is probably done hiking, but also done cutting for a while. Luna: So what does this mean for the average person? If you're looking for a job, wages are okay but not great. If you're retired, your savings are earning a decent return. If you're a policymaker, you're stuck. Lucas: And if you're an investor, you're looking at a market that's priced for perfection. The S&P 500 is at seventy-five fifteen, up a bit this week. But the Russell 2000 — small caps — is down. That divergence tells you that the market is rewarding companies with pricing power and global scale, not domestic cyclicals that need a growing workforce. Luna: It's a bifurcated economy. Big companies can automate, invest in AI, hire fewer people. Small companies need bodies, and bodies are scarce. Lucas: That's the takeaway for me. The labor force participation rate falling to a fifty-year low isn't just a statistic. It's a signal that the economy's engine is changing. And until we figure out how to bring people back in — through immigration, childcare, healthcare, retraining — we're going to be stuck in this low-growth, sticky-inflation rut. Luna: And the Fed can't fix that with interest rates. That's the real lesson. Lucas: Right. So we'll keep watching the participation data, the JOLTS numbers, the wage prints. And we'll keep bringing you the real story behind the headlines. Thanks for listening.