US | Lasting Covid imprint on labor force participation

Labor force participation is expected to recover from its historical plunge over the next two years, but not to its pre-pandemic peak. Our decomposition analysis shows that younger workers have largely returned to the workforce, while older workers are less likely to be back. We expect the participation rate to rise from 61.4% currently to 62.4% by Q4 2021, and 62.6% in Q4 2022.

We estimate 65% of the drop in the labor force participation rate (LFPR) in Q2 last year, or 1.3ppts, was due to discouraged workers. Discouragement was more prevalent among younger workers, who were overrepresented in the hardhit services industries. Encouragingly, young workers' participation has already regained two-thirds of its drop.

An acceleration of retirement trends, reflecting early retirement decisions and more disabled workers retiring, has weighed on overall participation by an estimated 0.5ppts in Q2 2020.

We estimate that around 2 million workers have left the workforce to retire since the start of the pandemic. This is more than double the number of people who left the labor force to retire in 2019, and will leave a permanent dent of about -0.4ppts on the participation rate.

Fed Chair Jerome Powell recently stated that the realization of such rebound in participation will indicate a broader recovery in the labor market – a signal that policy normalization can slowly begin. We expect the tapering of QE asset purchases to begin in mid-2022, followed by rate lift-off in mid-2023.