Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / How Stagflation Is Reshaping the Labor Force Participation Rate
Transcript
- Lucas: Luna, a number from yesterday's jobs report has been stuck in my head all morning, and it's not the headline payrolls miss of 57,000. It's the labor force participation rate down to 62.2 percent. That's the lowest we've seen outside of the Covid lockdown months in 2020. Luna: Yeah, I saw that. The unemployment rate ticked down to 4.2 percent, but that's partly because people stopped looking. The real story is the share of adults actually working or hunting for work shrinking. Lucas: Exactly. And if you look at the prime-age group—25 to 54—participation has been sliding too, from 83.3 percent a year ago to 82.9 now. That's a subtle move, but it's persistent. We're seeing the 'discouraged worker' effect that economists talked about in the 1970s and 1980s, but with a modern twist. Luna: I've been reading that the labor force participation rate falling to its lowest in 50 years outside of Covid—that's a CNBC headline from yesterday. And it ties directly to what we talk about on this show: the economy slowing while prices stay sticky. Lucas: Right. And before we dive deeper into the data, I want to mention something. If listening to us walk through these economic puzzles helps make sense of the world for you, we keep this show ad-free because of listener support. People who find value in it can throw a few bucks our way at buy me a coffee dot com slash fexingo. Luna: It genuinely helps. And it means we don't have to do mid-roll ad reads about mattress companies. Lucas: So back to that participation number. The headline payrolls number—57,000 new jobs in June—that's weak. But the participation rate tells us something deeper. The JOLTS data from May showed 7.594 million job openings, which is still historically high. So it's not that there are no jobs. It's that a chunk of the population has decided the available jobs don't pay enough, or don't offer enough stability, to make it worth their while. Luna: And this is where the stagflation angle bites. Usually in a slowdown, workers drop out temporarily, and when the economy picks back up, they come back. But with inflation eating up wage gains—average hourly earnings are up to $37.60, but real purchasing power is still squeezed—people are making permanent decisions. Early retirement, going on disability, moving to part-time gigs underground. Lucas: Yeah, the early retirement piece is striking. The Federal Reserve Bank of Atlanta has a tracker showing that the share of non-working adults aged 55 to 64 who say they're retired has jumped from about 60 percent pre-pandemic to nearly 68 percent now. Those people are not coming back. Luna: And that's different from the 1970s, right? Then it was mostly women entering the workforce to keep up with household costs. Now it's high-income households with stock portfolios and home equity that let them exit early. Lucas: Exactly. The 1970s saw a surge in participation because households needed a second earner. Today, households that accumulated wealth during the pandemic—especially in stocks and real estate—can afford to have one earner drop out. But the lower-income households are getting squeezed because they don't have that cushion. Luna: So we've got a bifurcated labor force. The participation drop is driven by the top, but the bottom is still struggling with high rent and grocery bills. And the JOLTS data shows openings are concentrated in low-wage sectors like leisure and hospitality, while professional services hiring is cooling. Lucas: That's the puzzle. 7.6 million openings, but they're mostly in roles that don't pay enough to cover the cost of living in many metro areas. So you get this paradox: employers saying they can't find workers, and workers saying they can't find good jobs. Luna: And the initial jobless claims number—215,000 for the week ending June 27—is low, which suggests people aren't being laid off en masse. They're quitting or just not entering. Lucas: Right. The quits rate in JOLTS has been drifting down, too, from 2.8 percent a year ago to 2.5 percent. That suggests workers are less confident about moving. They're staying put—or leaving the workforce entirely. Luna: One group that's interesting: prime-age men. Their participation has been declining for decades, but the rate of decline has accelerated. Some of that is disability—applications for Social Security Disability Insurance have risen about 15 percent since 2020. Lucas: That's a canary. When people can't find work that accommodates health issues or pays a living wage, they apply for disability. And in a stagflation environment, that pipeline gets bigger because the alternative jobs are worse. Luna: So what does this mean for policy? The Fed is focused on inflation—core PCE is still at 130.1, up from 129.67 last month. They can't cut rates to stimulate the labor market because prices are still sticky. Lucas: Right. And fiscal policy is constrained by the debt and deficit. So we're in a situation where the natural solution—stimulate demand to bring workers back—is off the table because it would reignite inflation. Luna: The 1970s echo is really strong here. Back then, policymakers tried to push participation through training programs and public employment, but it didn't work until Volcker broke inflation's back in the early 1980s. Lucas: And the participation rate only started rising again in the mid-1980s as real wages stabilized and job quality improved. That's the lesson: you can't talk people back into the labor force. You have to make work pay. Luna: So we're looking at a structural shift. The 62.2 percent participation rate might be the new normal, not a cyclical dip. That has implications for potential GDP growth, for the Social Security trust fund, for everything. Lucas: It means the economy's capacity to grow without generating inflation is lower. That's the stagflation bind in a nutshell: the supply side is constrained, demand is still hot enough to keep prices rising, and the labor market is shrinking. Luna: One last data point: the ADP private payrolls for June came in at 98,000—less than expected. That was before the official report. So the trend is consistent across surveys. Lucas: We'll be watching the July data closely. But for now, the participation rate is the number to watch. If it stays below 62.5 percent through the fall, that's a signal that something structural is happening. Luna: And we'll keep tracking it here on the show. Thanks for listening—if you want to support us, visit buy me a coffee dot com slash fexingo. It really helps keep this going. Lucas: Next time, we'll look at how this labor force dynamic is affecting commercial real estate. Until then, keep your eyes on the participation rate.