The Labor Force Participation Rate: Misleading Unemployment Numbers
If the August unemployment rate is down to 7.3%…
Then, why aren’t we smiling?
The reason is a declining labor force participation rate. The BLS tells us that the participation rate is, “the labor force as a percent of the civilian non-institutional population.” Meanwhile, to be in the labor force, you have to be 16 or older and employed or looking for a job. So, if you are 21 years old and not looking for a job, then you are not in the labor force. When that 21 year old left the labor force, she decreased the participation rate.
The US Labor Force Participation Rate:
And that takes us to a little bit of math. To calculate the unemployment rate, the number of unemployed people in the labor force is divided by the size of the labor force. What happens when your numerator shrinks because the participation rate declines? Then the fraction gets smaller.
Astoundingly then, we can have a lower unemployment rate and more unemployed people. You just need to have individuals leave the labor force. They diminish the participation rate and the unemployment rate numerator.
In this great Bloomberg Businessweek infographic, retirees are the largest group that is 16 or older and not in the labor force and 3% are those who “want to work.” You can also see more specifically why a lower unemployment rate is a misleading statistic.
Sources and resources: Perfect for data and graphs, the BLS was the source of my employment and participation rate graphs while for more analysis of the August unemployment data, I recommend this Washington Post article.