Teens active in the US labor market

The imbalance in the US labor market, i.e. excess labor demand compared to supply, was again reflected in the latest employment figures. In April, the unemployment rate fell to 3.4% and job openings remain almost double compared to job seekers. The strength of the labor market is an important factor in monetary policy and without a balance, the Fed is hardly ready to cut its interest rate, even if inflation figures fall.

As important as fluctuations in labor demand are changes in labor supply in the labor market. Recent years have been a time of revolution of work also in the US since the labor force participation rate (the number of people in the labor force as a percentage of the civilian noninstitutional population) decreased during the COVID pandemic but has since recovered close to pre-pandemic levels. In April, the participation rate was 62.6%, compared to 63% in spring 2020.

I was reading the economy blog of the Federal Reserve Bank of St. Louis that highlighted an interesting trend in the labor market, i.e. the return of young employees. As the graph below indicates, young people (aged 16-19) participated more actively in the labor force than seniors (aged 55+) before the financial crisis, and in 1989 the participation rate of teenagers was almost double that of the older age group. However, the gap has been closed in the 1990s to 2000s and, after the financial crisis, the participation of older people has been higher than that of young people. However, there was a clear change in seniors’ labor market participation during the COVID crisis as the participation rate dropped and has still not recovered. This is explained, e.g., by health concerns and increased wealth (e.g. the rise of the stock market), which lowered the threshold to opt out of the labor market.

Seniors exiting the labor market also means a setback in labor supply but it seems that young people have returned to fill this gap. This is also reflected in the increased participation rate of young people. The situation in the labor market also partly contributes to this: when there is a shortage of labor, wages increase and employers are willing to train employees. This has meant an increase in the participation rate and a decrease in the number of college students.

Based on this development, young people are the future of the American labor market. However, it should also be born in mind that young people’s participation is cyclical: work is attractive in a strong economic cycle but when the economy makes a downturn studying is often the option. However, even then the demand side will also ease tensions in the labor market.