How American women can help the Fed — and vice versa

Female labour participation is rising again, relaxing supply constraints on the economy

US labour market participation rates have fallen sharply in the past two decades, reducing the growth in the labour force and potential GDP. Much of this decline has been due to the ageing of the population. Increases in the proportion of older cohorts automatically results in more retired workers, which lowers participation rates in the overall economy (see box below).

The impact from ageing will not improve in coming years. However, the overall participation rate is also affected by cyclical and structural changes within any given age group.

Fortunately, there are now encouraging signs that more people in the prime age group of 25-54 years, especially women, are responding to improvements in job availability. The resultant rise in the labour supply is boosting potential GDP more rapidly than expected, providing room for the Federal Reserve to pause its tightening in monetary policy without endangering inflation.

“Since 1979, women have accounted for a majority of the rise in real household income

Janet Yellen, Fed chair, 5 May 2017

In one of her last speeches as Fed chair, Janet Yellen offered a history of female labour participation in the last 125 years. It is a compelling and ultimately inspirational story, which I strongly recommend everyone to read.

Women’s participation rose from 36 per cent of the prime age population in 1950 to 75 per cent in the early 1990s. In the past 25 years, however, the story has become far less positive. Female participation has been broadly flat over that period and it plummeted after the 2008 recession.

Fortunately, the clouds parted at the end of 2015, and, since then, prime age female participation has risen by almost 2.5 percentage points, reversing the entire decline that occurred during the great recession. These changes are of first order importance for the performance of the economy and for the health and welfare of US citizens.

Ms Yellen says that potential GDP growth from 1948 to 1990 was directly boosted by 0.5 percentage points per annum by the rise in female participation, about one-fifth of all the growth in American GDP per head. She also concludes that potential GDP could be boosted by a further 5 percentage points if female labour participation could be increased by the 13 percentage points still needed to match current male participation rates.

Using these rules of thumb, it appears that the rebound in female participation since 2015, along with the smaller rise in male participation, may have added 1.0-1.5 per cent to potential GDP. This has received very little attention in recent Federal Open Market Committee discussions but it could have raised supply capacity by an amount similar to the increase in demand that followed the fiscal stimulus last year. This gain is certainly not to be sneezed at.

The key question from now on is whether female participation will rise further in coming years. The Congressional Budget Office is not very optimistic, expecting participation to be roughly constant, but policy changes could improve the outcome.

There are structural and cyclical factors at work here.

On the structural side, the generally disappointing level of female participation in the US since the 1990s needs to be addressed. Over the period from 1990 to 2010, America fell from sixth to 17th in a ranking of 22 advanced economies in this field.

Many foreign countries have shown that policies related to child care provision, part-time work and parental leave are particularly effective. Canadian policy changes, for example, have encouraged parents to maintain a continuous attachment to employment during child care, substantially boosting participation.

The US has been less ambitious than almost all other countries in the adoption of such policies, and evidence suggests it could raise female participation by as much as 8-9 percentage points by adopting similar measures.

These structural labour reforms would fall well outside the purview of the Fed, but the impact of the economic cycle in driving higher participation is squarely within their responsibility. The central bank can help boost female participation by erring towards a tighter labour market whenever inflation permits.

Strong demand for labour raises real wages and improves incentives for employers to attract fringe workers into the active labour market. This is probably why female participation has suddenly risen sharply as the labour market has tightened.

This trend has already eased an important dilemma facing the FOMC. Economic capacity had been under increasing strain as the growth in demand remained firm. A favourable response from the supply side — so-called “supply side endogeneity” — has prolonged the expansion.

The Fed has therefore benefited from the effects of a rising prime age participation rate, particularly among women, and it should do all it can to maintain this improving trend. Under Ms Yellen, the FOMC focused on under-employment (ie participation) in addition to measured unemployment, and Chairman Powell should do likewise.


Recent behaviour of US labour participation rates

Labour participation rates for all age groups over 16 in the US fell sharply from 2008-15, as the recession and population ageing combined to reduce participation. Since 2015, however, the effects of the economic recovery have triggered a recovery in prime age participation rates (aged 25-54 years). This has been offset by a further ageing in the population, leaving overall participation rates little changed.

US Labour Force Participation Rate

Turning specifically to prime age groups, participation rates for both sexes generally declined from 2000-15, especially during the great recession after 2008. However, as the US economic recovery has matured, prime age participation has started to rise again, especially among women.

US Labour Force Participation Rate 2001-2019

In the past two decades, the decline in prime age US female participation has parted company with the direction in other advanced economies, where it has generally continued to rise. As a result, the US has fallen behind other major advanced economies. Any catch-up would represent a major opportunity for greater supply potential in the US economy.

Female Labour Force Participation Rate



Source: This note is based on material which appeared in an article by Gavyn Davies published in the Financial Times on 11 February 2019.
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