With the employment participation rate stalling in recent months, economists worry that there aren’t enough workers to grow the U.S. economy.

In the latest employment report, the participation rate was 62.2%, more than a point below the 63.4% rate before the pandemic. That amounts to 1,964,000 potential workers on the sidelines.

From that perspective, low participation is a problem. But maybe that isn’t the proper perspective. Viewed another way, participation is high by historic standards. The chart below shows the number of people employed in the private sector divided by the current population.

Private Sector Employment

Economists use private sector employment because these are the wages that support the economy. Government jobs are critical, but they don’t increase economic activity. Salaries for those jobs need to come from private-sector taxes.

At 38.3%, the ratio is about 50% higher than in the 1950s and early 60s — a time often considered the golden era of the economy — and it’s a time when very few workers were supporting the economy.

The rate from that time is too low in the modern world. Real wages are lower, and two-earner families are common. We can’t go back to the 1950s.

Employment Numbers Looks OK

We are also unlikely to go back to the pre-pandemic levels of employment metrics. The participation rate was near an all-time high before the pandemic hit. Without creating inflation, the economy can’t maintain all-time high employment for extended periods.

Labor force participation was about 59% in the 50s and early 60s. The current rate should probably be somewhere between 59% and 63%. At 62%, the participation rate could be where it should be.

If that’s the case, we are closer to the Federal Reserve’s goal of full employment than traders expect. Interest rates will need to rise quickly to strangle inflation since the Fed doesn’t need to worry about employment.

Michael Carr is the editor of True Options Masters, One Trade, Peak Velocity Trader and Precision Profits. He teaches technical analysis and quantitative technical analysis at the New York Institute of Finance. Follow him on Twitter @MichaelCarrGuru.

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