Policy Feature Issue: The Labor Force Participation Rate

The Labor Force Participation Rate

Policy Feature Issue: Labor Force Participation Rate

Last Friday, The Bureau of Labor Statistics (BLS) released its April monthly jobs report revealing another drop in the unemployment rate, which should be good news.  But this number is deceiving.  One of the most important underreported measures of long-term economic growth in the United States is the Labor Force Participation Rate.  April’s Labor Force Participation Rate, like March’s, sat at 63.3%, its lowest level since 1979[1].  Among the many unreported employment numbers, for example, is the fact that since February, nearly 300,000 individuals have left the workforce and have not returned.[2]  Thus, if participation rates had remained steady during  President Obama time in office, unemployment would actually be 10.9%[3].

But what exactly is the Labor Force Participation Rate and what are the implications of its overall decline?

What is the Labor Force Participation Rate?

The Labor Force Participation Rate is a ratio that identifies the number of people who are active participants in the labor force relative to the overall population (within the same age range).  Active participants in the labor force include those who currently hold employment as well as those individuals who are unemployed but actively seeking work, and are between the ages of 16 and 65.  Unlike the Unemployment Rate, which measures the prevalence of unemployment, the Labor Force Participation Rate compares the labor force against the general population, identifying who is and who isn’t working, making it a better metric for determining the long-term strength of an economic recovery.

Facts You Need to Know:

  • The percentage of Americans in the labor force remained at three decade lows between the months of March and April.  Despite the number of jobs created in April, many working-aged Americans are still discouraged by the current economic climate and jobs market and have left the workforce entirely.  The current Labor Force Participation Rate is at its lowest point since 1979.
  • The real legacy of the Obama economy is hopelessness among job seekers.  Since Obama took office, the number of prospective participants in the workforce has increased by 7.5 million people, but the workforce has only increased by 833,000 workers.  This means that the number of individuals who don’t even feel it worth the effort to look for work has increased by 6.6 million under the Obama economy.[4]
  • Much of the problem stems from anemic job creation numbers.  In April, 165,000 jobs were added, facilitating a slight drop in the overall unemployment rate.[5]  These numbers, offset by unchanged labor force participation rates during the month of April, still point to an economic recovery that is stunted by a lack of real economic growth and job creation.
  • As a result, the decline in the unemployment rate is misleading.  Much of the decline in unemployment can be attributed to declining labor force participation.  If participation remained steady since January, 2009, the unemployment rate would be 10.9 %, not 7.5%.[6]

Why Does a “Pro-Growth” Agenda Matter?

Along with productivity, the Labor Force Participation Rate is an important measure of long-term economic growth.  A smaller pool of workers available for employment limits potential economic growth.  In a goods and services-based economy like the U.S., growth is dependent upon a large available pool of workers as well as increased output.  However, the current decline in labor force participation among younger workers should be especially concerning.  The BLS estimates that in 2020, the participation rate of workers ages 16-24 will only be 48.2%, an almost 17% drop from 2000, and a 7% decrease from 2010.[7]  Many of these potential employees are leaving the workforce simply due to a lack of economic opportunity, creating the mirage of low unemployment.

A strong and deep workforce broadens the overall tax base and increases revenue to the federal government.  This is a far more organic way to increase revenue than raising taxes.  The decline in revenue as a result of low labor force participation is also a contributing factor in a constantly increasing federal deficit.

Finally, a declining Labor Force Participation Rate can be a contributing factor in home foreclosures, lethargic consumer growth, and uncontrollable student debt for younger Americans.[8]

[1] See http://data.bls.gov/timeseries/LNS11300000

[2] See Bureau of Labor Statistics: Labor Force Statistics from the Current Population Survey. <http://www.bls.gov/web/empsit/cpseea03.htm>

[3] See Joint Economic Committee: Jobs Report Better than Expected, Jobs Gap Still Remains Above 4 Million. <http://www.jec.senate.gov/republicans/public/index.cfm?p=EconomicNews&ContentRecord_id=3C090AB6-7FDA-4ECC-89FB-924DF5E23C29>.

[4] See Bureau of Labor Statistics: Employment status of the civilian noninstitutional population, 1942 to date. <http://www.bls.gov/cps/cpsaat01.htm>

[5] See Bureau of Labor Statistics: Employment Situation Summary – April 2013. <http://www.bls.gov/news.release/empsit.nr0.htm>

[6] See Joint Economic Committee, supra note 2

[7] See Bureau of Labor Statistics: Civilian labor force participation rates by age, sex, race, and ethnicity. <http://www.bls.gov/emp/ep_table_303.htm>.

[8] See Federal Reserve Bank of New York: Household Debt and Credit: Student Debt. <http://www.newyorkfed.org/newsevents/mediaadvisory/2013/Lee022813.pdf>