America's Job Market May Have Improved Return-to-Work Rates

Whether would-be workers linger on the U.S. labor market’s sidelines is a key question: it will determine how fast the country’s economy can grow, how fast wages might rise, and, potentially, how patient the Federal Reserve can afford to be with rate increases.

It’s also incredibly hard to answer.

Some commentators take in America’s 4% unemployment, elevated job openings and gradually rising wage gains and declare victory over labor slack. Others observe a prime-age employment rate that is lingering well below historical highs and see further room for improvement. Fed Chairman Jerome Powell talked about the dynamics extensively while speaking before the Senate Banking Committee Tuesday, saying at one point that as people return to — or stay in — the job market, “we have learned this year that there’s more slack.”

Still, Powell warned again and again that monetary policy and a strong economy can do only so much to bring potential workers back. At some point, policy changes are needed to eliminate disincentives and drive people to punch the clock. Goldman Sachs Group Inc. economists could offer the Fed Chair some comfort.

David Choi and his colleagues dig into a recent increase in labor force participation — the share of people working or looking out of the working age population has marched up 0.5 percentage points to 63.2% over the past year — and find that about 40% of it came from a decline in workers saying that they are disabled.

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