Has The Size Of The U.S. Labor Force Reached Its Peak?

by: The Mays Report

By G C Mays

Today's Employment Situation Report released by the BLS indicated that non-farm payrolls increased by 120,000 in November. This was a bit less than the estimate of 206,000 delivered by ADP on Wednesday. I indicated in my December 2, 2011, Morning Coffee note that a large divergence between the two was a likely scenario.

There was a large shift in the unemployment rate with the rate falling to 8.6% in November. However the fall was due in large part to 315,000 people leaving the labor force. The monthly change in the number of people characterized as not in the labor force rose by 487,000. This indicates that the new entrants to the working age population and those who were already looking for work either became discouraged about their prospects for finding employment or left the labor force for other reasons.

I see a new trend emerging regarding the size of the U.S. labor force. While the working age population in the U.S. continues to grow at a constant rate, the size of the U.S. labor force has stagnated. After growing at a fairly constant rate along with the working age population since 1975 the size of the U.S. labor force peaked at 154.9 million in May of 2009 and has fluctuated between this peak number and 153 million since that time.

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Growth of US Labor Force

Source: The Mays Report

This early trend is strikingly similar to what happened in Japan in the 1990s. The size of Japan's labor force peaked at 68.1 million in June of 1997 and has trended down since that time.

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Source: The Mays Report

Japan released its employment report for October earlier this week and reported an unemployment rate of 4.4%, which I noted was deceiving in a short piece I wrote on Wednesday. Looks impressive until you see that only 59.3% of the working age population participates in the labor force with only 56.6% of that population employed. In the U.S., the labor force participation rate fell to 64% in November. The last time Japan had a labor force participation rate of 64% was December 1993 when the country's unemployment rate was 2.81% with 62.2% of the working age population employed. Since then Japan has only experienced real GDP growth in excess of 2% on one occasion.

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Real GDP Growth in Japan

Source: TradingEconomics.com; Economic & Social Research

Personal consumption expenditures in the U.S. most recently represented 70.8% of GDP and knowing that current income is the most relevant determinant of consumption, and with real GDP growth in the U.S. beginning to struggle to keep up annual growth rates above 2% I wonder, like Japan in the 1990s, has the labor force in the U.S. reached its peak size? Only time will show the true causes and structure of changes in the labor force in the U.S. Right now, I see the beginning of a similarity between what happened with Japan's labor force and what could happen with our own.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.