Sidelined workers could keep job growth from stalling

The economy has churned out an average of 200,000 jobs per month this year. But the pace is sure to slow unless more workers come off the sidelines.

Between the lines: The long-running U.S. economic expansion has driven unemployment down to 3.7%, a half-century low. And to attract and keep workers, companies are raising wages at their fastest pace since 2009. But these improving conditions have yet to change the minds of millions of Americans who have given up looking for work. Unless they are drawn in, their absence could start to be a drag on economic growth.

A whopping 95.8 million Americans have not looked for work for 12 months or longer, according to the Bureau of Labor Statistics.

By the numbers:

• The labor force participation rate — the percentage of workers 16 and older who are working or looking for work — has effectively not budged since 2012.
• A large part of that is because many of them are retired — baby boomers and others. But many are also of prime working age, and simply no longer seek work.
• The number of prime-aged people between the ages of 25 and 54 who are either working or looking for work remains stubbornly below when the economy was last close to full employment — back in 2000, per the Economic Policy Institute.

"There are still workers out there, mostly men of prime working age who could come back into the labor force if there was a good match."

Yet, many are not. So worker-hungry companies are having to up their game. In addition to hiking wages, some are figuring out how to grab long-term unemployed people.

• "A tight labor market is going to make hiring managers think a little bit different," said Tami Forman, executive director of Path Forward, a nonprofit that helps big companies hire people long out of work.
• Companies haven't quite reached the point where they are hiring atypical candidates in droves, Forman said. But she has seen an uptick in long-unemployed people wanting to return to work.

There are serious doubts that sufficient numbers of workers will make themselves available. On average, this year's employment gains are greater than last year's 182,000 per month, and the 195,000 per month in 2016. And economists expect companies to continue offering plenty of new jobs.

• But "are there 200,000 people [a month] who can fill those jobs?" James Knightley, an economist at ING, told me.
• "Job growth will need to moderate over the next year because there aren't enough workers to hire anymore," said Paul Eitelman, an investment strategist at Russell Investments.

What they're saying: Neel Kashkari, president of the Minneapolis Fed, has cautioned strongly against raising interest rates further, arguing that it could hamper the re-employment of the long-term jobless.

• “We’ve been surprised how many people wanted to work and took jobs as the economy strengthened," Kashkari, who will not participate in interest rate-hiking decisions until 2020, told me in an emailed statement. "The truth is we don’t know how many people may want to rejoin the labor force. But we should be patient to let as many people find jobs as possible while keeping inflation in check.”