You might think that the Labor Force Participation Rate [LFPR] would mean the percentage of the population that is working but it doesn’t mean that at all. And a quick read of the definition presented by the BLS would reinforce that misconception.
As a matter of fact the BLS Glossary gives this definition:
Labor force participation rate- The labor force as a percent of the civilian noninstitutional population.
But further research on the BLS site leads you to this expanded explanation:
- The labor force participation rate is the percentage of the [civilian non-institutional] population that is either employed or unemployed (that is, either working or actively seeking work)
- People with jobs are employed.
- People who are jobless, looking for a job, and available for work are unemployed.
- The labor force is made up of the employed and the unemployed.
- People who are neither employed nor unemployed are not in the labor force.
How can you be neither employed or unemployed? A rational person would think that you had to be one or the other. But according to the BLS definition… long term unemployed people are simply defined out of existence and therefore are neither employed nor unemployed. They are the roughly 40% of the population that are not participating in the labor force.
So in simple terms the Labor Force Participation Rate is: The percentage of the population that is working or “actively looking” for work.
But we must add a couple of big Caveats.
- By population we don’t mean everyone. Only those who aren’t in the military, in Jail or other institution. (This makes the percentage higher than if we looked at everyone).
- You haven’t become discouraged and stopped looking for a job (even though you might want one).
If you are long term unemployed (and therefore not officially in the labor force) and you start looking for a job two things happen to the statistics:
- The Unemployment Rate goes up because a new unemployed person is added.
- The Labor Force Participation rate also goes up because a new person was added to the labor force.
If we look at the BLS’ Seasonally Adjusted Labor Force Participation Rate we see that is has fallen drastically since 2009. For the 20 years from 1989 to 2009 the LFPR held fairly steady at around 66% of the workforce being employed but it is now below 63%. In January 2015, the Labor Force Participation Rate was 62.9% it slowly worked its way down to 62.5% in October 2015 and November but has now rebounded a bit back up to 62.7% in December 2016 up slightly from 62.6% in November. A falling LFPR indicates a larger percentage of the total population is not looking for a job either voluntarily or involuntarily.
Labor Force Participation Rate
According to the Bureau of Labor Statistics the “Labor Force” is made up of both employed and unemployed people. Unemployed people are defined as those who are actively looking for work. Once you stop looking (i.e discouraged workers) you are no longer in the official labor force.
So if the Labor Force shrinks because people quit looking for a job the LFPR falls. And because of the way that the unemployment rate is calculated:
- As the LFPR falls it appears that the unemployment rate is falling
- Even though there are the same number of people who can’t find jobs (but are no longer “officially” unemployed since they stopped looking for a job).
If we look at the Labor Force Participation Rate since 1948 when the government began tracking it we will see it bounced around under 60% until the early 1970’s when more women entered the workforce. And then it skyrocked under Carter as the economy was so bad that households needed two incomes to survive. It continued to climb under Reagan and then leveled out at around 66% under Bush 1. It remained at that level under Clinton and Bush 2 and then took a dive under Obama where a falling LFPR masked a disasterous level of unemployment.
Tom Thomas, one of our readers reminds us that if you want to compare U-3 numbers you have to do it in light of the Labor Force Participation Rate (LFPR). He said, since U-3 only measures those who are actively looking for a job, if the labor force declines (i.e. lots of people stop looking) the U-3 rate will appear better than it actually is. So, in order to compare two time periods you have to adjust for the the LFPR.
The U-3 Unemployment rate during the Bush administration averaged 5.2% with an LFPR above 65%. And if you are thinking that the current decline in LFPR is actually a result of more seniors retiring early (it’s not) see Record Low LFPR which shows the LFPR by age group since 1999. The biggest declines occur in the younger ages while those above age 60 actually show a higher percentage are working. For instance in 1999 only 24% of those age 65-69 were working but 14 years later 31% of those age 65-69 were working. This is not good… it means that people of normal retirement age are not able to retire due to economic reasons.
Other reasons the LFPR could decline:
- If more people are self-employed (self-employed individuals are not counted in the labor force).
- If more people retired (currently not the case according to employment statistics).
- If more people work “under the table” (i.e. unreported income).
- Illegal aliens taking jobs (i.e. not reported as part of the workforce).
- If more people are on Welfare (not in the workforce).
- If more people work in the “gig-economy” they may not show up in the workforce.
So why has the unemployment rate fallen so much since 2010?
As people stop looking for jobs (discouraged workers) the Labor Force Participation Rate (LFPR) falls. Because of the way that the unemployment rate is calculated.
The big lie perpetrated by a falling LFPR
As the LFPR falls (bad) it appears that the unemployment rate is falling (good). So even though the ranks of the unemployed stays the same (or even grows) the numbers look like things are getting better. See also Is the U.S. Really at “Full Employment”?