Unemployment and labor force participation (LFP) are usually negatively correlated over the business cycle -- that is, once the unemployment rate starts to decline the LFP rate starts to increase after about half a year. In the latest issue of Economic Quarterly, Richmond Fed senior advisor Andreas Hornstein shows that this cyclical co-movement pattern between the unemployment rate and the LFP rate can be attributed to two factors. First, low unemployment rates imply a low average exit rate from the labor force, which in turn increases the LFP rate. Second, transition rates from out-of-the-labor-force to employment without an intervening unemployment spell increase as unemployment rates decline. The behavior of unemployment and LFP in the current recovery has been "unusual" -- even though the unemployment rate has been declining since 2010, the LFP rate has not yet begun to increase. This unusual behavior is potentially informative about the relative magnitude of the cyclical and trend component in recent LFP rate movements.
Also in the First Quarter 2013 issue:
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