Federal Reserve Vice Chairman Stanley Fischer said sluggish labor supply growth is a “source of concern” because it may contribute to a slowdown in longer-run output of the economy, which also faces a drag from housing and “broad based” slowing across emerging markets.

Falling labor-force participation largely reflects an aging population, though there’s “considerable uncertainty” about how much is due to the sluggish economy, Fischer said Monday in remarks prepared for delivery in Stockholm. The participation rate, which measures the share of working-age people in the labor force, is 62.9 percent, near the lowest since 1978.

“There are good reasons to believe that some of the surprising weakness in labor-force participation reflects still poor cyclical conditions,” Fischer said. “Many of those who dropped out of the labor force may be discouraged workers. Further strengthening of the economy will likely pull some of these workers back into the labor market, although skills and networks may have depreciated some over the past years.” 

In his second speech since joining the Fed in May, the former Bank of Israel gov. said many advanced economies still struggle after the U.S. recession “left the road ahead unclear.” Central bankers are grappling with how to gauge slack in the economy and whether sluggishness is due to temporary factors they can influence or permanent ones that are beyond the reach of their monetary policy tools.

“How much of this weakness on the supply side will turn out to be structural ― perhaps contributing to a secular slowdown ― and how much is temporary but longer-than-usual-lasting remains a crucial and open question,” Fischer, 70, said at a Swedish Finance Ministry conference. (Bloomberg)