The Big Idea

Labor force participation has fully recovered

| April 14, 2023

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

A frequent point made during the pandemic was that low labor force participation caused labor shortages. Many people did step away from working for a while during the pandemic for a variety of reasons. But labor force participation recovered rapidly beginning in 2021. By early this year, labor supply returned to pre-pandemic settings by a variety of measures. The notion that the labor market would cool off if only people came back to work, still repeated often in the popular press, is definitively no longer true. The implication is that if the Fed wants to bring the labor market into better balance, it has no option other than to dampen the demand for workers.

Overall labor force participation

I suspect the main reason that many people have been so confused on this issue is that the labor force participation rate (LFPR) has an ongoing secular downtrend.  The Labor Department defines the “working-age population,” the denominator of the ratio, as ages 16 and over. There is no age ceiling.  As a result, as the US population ages and a growing proportion of the population reaches retirement years, the overall LFPR falls, because the 65-and-over age cohort, which has a very low LFPR, accounts for a growing weight in the calculation. This trend long predates the pandemic.  In fact, academic economists have been writing about it for at least 20 years.

The BLS publishes age-specific data on labor force participation, breaking down the population into seven buckets: 16-19, 20-24, 25-34, 45-54, 55-64, and 65 and over.  We can isolate the impact of demographic shifts by crafting a hypothetical series for the LFPR that holds the population weights for those seven components constant over time.  That leads to the official LFPR and the age-constant alternative (Exhibit 1).

Exhibit 1: Labor force participation: actual versus age-constant

Source: BLS, SanCap calculations.

It is quickly clear why observers without intimate knowledge of the data would conclude that labor supply remains constrained, as the LFPR remains well below the February 2020 reading: 62.6% in March 2023 compared to 63.3% in February 2020.  However, the age-constant LFPR tells a very different story.  It rose to 66.7% in March, well above the 2019 average and within two tenths of the 20-year high registered in February 2020.  In fact, the March reading was not far from the all-time high.

Over the decade preceding the pandemic, the gap between the LFPR and the age-constant alternative widened by roughly one quarter of a percentage point per year.  If we extend that trend over the three years since the pandemic began, it adds up to three quarters of a percentage point, roughly the difference between the February 2020 and March 2023 LFPR figures.  In sum, the “shortfall” in LFPR today versus prior to the pandemic represents the passage of time and the aging of the adult population, not a deficiency of labor supply.

Prime-age LFPR

A less precise but simpler way to control for shifting demographics is to focus on the “prime-age” LFPR, which covers ages 25 to 54. This measure slightly exceeded the February 2020 level in February and March (Exhibit 2).  In fact, the March reading of 83.1% is the highest since 2008 and within about one tenth of being a 20-year high.

Exhibit 2: Labor force participation ages 25-54

Source: BLS.

Detailed age breakdown

We can gain additional insight by looking at the LFPRs for the seven age groups detailed above.  Exhibits 3 and 4 show the LFPRs for ages 16-19 and ages 20-24, respectively.  Labor force participation for these two age groups has behaved quite differently since the onset of the pandemic.  More 16- to 19-year-olds have worked, likely a reflection of the sharp increases in wages paid for jobs traditionally filled by teenagers (fast food, retail and so on) and jobs that do not require college degrees (skilled trades, trucking and so on).  In contrast, the LFPR for 20- to 24-year olds has not fully recovered.  This may reflect, at least in part, decisions to extend education made in the early days of the pandemic (i.e., to go to college or to graduate school rather than enter a soft job market).  In any case, a weighted combination of these two groups shows that the LFPR for 16- to 24-year-olds is just shy of the pre-pandemic high and well above the 2019 average.

Exhibit 3: Labor force participation ages 16-19

Source: BLS.

Exhibit 4: Labor force participation ages 20-24

Source: BLS.

Exhibit 5 shows the LFPR for the next age cohort, 25- to 34-year olds.  The results are quite similar as for the 16-to-24 group.  The LFPR has largely recovered but is just shy of the pre-pandemic peak (though well above the 2019 average).  However, I suspect that the narrative is quite different.  I would attribute the slight shortfall to the difficulty of finding affordable child care, as this age cohort is the most likely to have young children.  Indeed, the LFPR for women in this age cohort is nearly a full percentage point below the early 2020 peak, while the LFPR for 25- to 34-year old men is above the pre-pandemic high.

Exhibit 5: Labor force participation ages 25-34

Source: BLS.

Exhibit 6 covers the 35- to 44-year old cohort.  This age group has blown through pre-pandemic highs by a substantial margin, exceeding 84% in March for the first time since 2009.

Exhibit 6: Labor force participation ages 35-44

Source: BLS.

Exhibit 7 tells a similar story for the 45-to-54 age cohort.  The LFPR exceeded the pre-pandemic high last summer and has fluctuated back and forth since.  As with the prior group, the LFPR recently reached its highest level since 2009.

Exhibit 7: Labor Force Participation Ages 45-54

Source: BLS.

Exhibit 8 covers the 55-64 age group.  The LFPR for this cohort exceeded pre-pandemic highs for the first time in March.  In fact, last month’s reading matches the all-time high for this age group.

Exhibit 8: Labor Force Participation Ages 55-64

Source: BLS.

Finally, Exhibit 9 shows the LFPR for ages 65 and over.  This group represents the anomaly, as it is the only one for which the LFPR remains far below pre-pandemic levels.  I suspect that this reflects two factors.  First, just as the general population is getting older, this group is likely also getting older on average, as a rising percentage of this cohort is presumably considerably above the traditional retirement age and thus less likely to work.  In addition, I suspect that most of those early retirements that occurred in 2020 have proven persistent.  Historically, the re-entry of retirees back into the labor force has been relatively rare, and that appears to be holding in the post-pandemic period as well.

Exhibit 9: Labor Force Participation Ages 65 and Over

Source: BLS.


For most of the pandemic, the labor market was exceedingly tight, with red-hot demand facing constrained supply.  Demand for workers has been moderating, though it is still robust.  Meanwhile, the supply side of the equation appears to have roughly fully recovered.  The detailed age-cohort data suggest that labor force participation is about as high as we can reasonably expect based on historical patterns.

Perhaps we might be able to squeeze out a few tenths more in the labor force participation rate as college-age young adults finish their schooling and enter the job market and as the capacity of the child care industry fully recovers, but I suspect that the LFPR is now about where it is supposed to be.  For it to go higher, firms are likely going to have to get more aggressive in their wage and benefit offerings.  If the labor force participation rate levels off near current levels, then the only way for the Fed to engineer a cooling in the labor market will be to dampen labor demand by enough to bring job growth well below the pace consistent with population growth (roughly 100K per month).  Most economists do expect a dramatic weakening in payroll gains over the next several months to achieve exactly that, but I anticipate that job growth will only gradually moderate, in which case the unemployment rate would likely stay well below 4% for most or all of 2023.

Stephen Stanley
1 (203) 428-2556

This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at

Important Disclaimers

Copyright © 2023 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.

In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.

The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.

In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.

Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.

The Library

Search Articles