Tags: Balakrishnan | labor | participation | economy

IMF's Balakrishnan: Drop in Labor Participation Rate Major Threat to Economy

By Dan Weil   |   Wednesday, 13 Aug 2014 02:59 PM

The labor force participation rate hit a 36-year low earlier this year and stood at only 62.9 percent in July.

That's a big problem for the economy, notes Ravi Balakrishnan, deputy division chief of the North American division of the International Monetary Fund's Western Hemisphere Department.

"It's not supposed to be this way," he writes in a blog post. "As the U.S. economy recovers, hirings increase and people are encouraged to look for jobs again."

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But that's not how it has panned out. "Fully one-half of the gains in participation rates between 1960 and 2000 . . . have been reversed in the last six years," Balakrishnan explains.

As for the economy, "the dynamics of the U.S. labor market is perhaps the most critical — and uncertain — issue in economics today," he notes.

The size of our workforce will be a crucial determinant of the rate at which the economy grows, Balakrishnan argues.

In addition, "the extent to which the recent declines in participation rates are reversible will be the principal factor in deciding future wage and price inflation." That, in turn, will determine the timing and pace of Federal Reserve interest rate hikes, he maintains.

"Policies in the coming years should focus on maximizing the potential of the U.S. labor market. Demographics cannot be reversed but progress can still be made," Balakrishnan states. "Economic policies that get the country growing again will help strengthen the labor market, raise wages, and bring people back into the labor force."

Meanwhile, many experts are worried about the fact that the jobs lost during the 2007-09 recession paid a lot better than do the ones replacing them.

"While it is no secret the recession wiped out millions of higher-paying jobs and forced many former middle-class workers into second-rate jobs, the longer-term effects of this phenomenon could pose obstacles to continued economic growth," according to The Fiscal Times.

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