Fed's Bullard wants more research into what drives labour market participation

St Louis Fed president James Bullard yesterday called for more detailed research into what determines the level of a household's participation in the labour market, in a speech delivered to the Exchequer Club in Washington, DC.

Bullard noted that the labour force participation rate has "suddenly become a salient topic" since it experienced sharp declines following the financial crisis and recession of 2007–09, and outlined two basic views of why that decline happened.

Under the "bad omen" view, Bullard said a decline in the unemployment rate does not really reflect an improving labour market, rather that labour market dropouts reflect frustration with – and are a bad omen for – the state of the economy.

Under the opposing, "demographics" view, the decline in labour force participation simply reflects changing demographics in the US economy, and "recent sharp declines in the unemployment rate should indeed be taken as indicative of an improving economy and an improving labour market".

"Since the FOMC has explicitly tied monetary policy choices to labour market performance", he said, "it is of considerable importance which view is more nearly correct". To that end, he reviewed some of the literature on the subject, and came down broadly on the side of the "demographics'" view of why participation is falling.

However, he said more detailed treatment regarding household decision-making would be necessary "if we want to move the debate on labour force participation forward".