How to understand the Labour Force?

The labour force is made up of those who are employed and those who are unemployed. The Bureau of Labour Statistics, a federal agency that measures labour market activity, working conditions, price changes and productivity, explains what these two categories mean:

The employed: People with jobs are considered employed. Their jobs can be part-time, full-time, temporary or year-round.

The unemployed: People who are jobless, have looked for a job in the past four weeks and are available for work are considered unemployed.

1.The participation rate

The labour force participation rate is the measure to evaluate working-age population in an economy. The participation rate refers to the total number of people or individuals who are currently employed or in search of a job. People who are not looking for a job such as full-time students, homemakers, individuals above the age of 64 etc. will not be a part of the data set. This is an important metric when the economy is not growing or is in the phase of recession. It is that time when people look at the unemployment data.

The labour force participation rate is calculated as: (Labour Force ÷ Civilian No Institutional Population) x 100.

At the time of recession, it is generally seen that the labour force participation rate goes down. This is because, at the time of recession, the economic activity is very low which results in fewer jobs across the country. When there are fewer jobs, people are discouraged to focus on employment which eventually leads to lower participation rate. The participation rate is also important in understanding the unemployment rate in the economy. Analysing consistently the unemployment rate in the economy is very important.

A good sign of the economy

If the rate is on the higher side, it is a good sign. But if it is on the lower side, it can also act as a warning sign for any economy. For that reason, participation rate as well as unemployment data should be looked into simultaneously to understand the overall employment status in the economy.

Although minor changes in the labour force participation rate can be informative, it is often used to study long-term trends among different segments of the population. In 1973, for example, women had a 46% participation rate while men were near 80%. In the three and a half decades since, women have seen steadily increasing labour force participation, nearing 60% in 2007. Male labour force participation, on the other hand, has been decreasing, nearing 70% in 2007.

Comparing different segments of the population helps show where the labour market succeeds or fails in incorporating the working-age population.

The Effect of the LFP Rate on the Economy

A decline in the number of people participating in the labour force can have a negative impact on the overall economy.

According to research published by the Federal Reserve Bank of Philadelphia in 2017, a falling LFP rate can slow the growth of GDP, since fewer people are contributing to the nation’s output of goods and services. Additionally, a lower participation rate can lead to higher tax rates, since the government has a narrower tax base from which to draw revenue, the authors noted.

The labor force participation rate is one of many important statistics to look at when examining the overall health of the labour market. Understanding the factors affecting the rate can also help in understanding the potential impact of LFP trends on the economy as a whole.

2.Unemployed

While no single number captures all the nuances in the health of the labour market, the unemployment rate is considered one of the most important economic indicators.

People waiting to start a new job must have actively looked for a job within the last 4 weeks in order to be classified as unemployed. Otherwise, they are classified as not in the labour force.

The unemployment rate measures the share of workers in the labour force who do not currently have a job but are actively looking for work. People who have not looked for work in the past four weeks are not included in this measure. It is important to keep in mind that the rate measures the percent of unemployed job seekers in the labour force—the sum of employed and unemployed persons—and not the entire population

There are six different ways the unemployment rate is calculated by the Bureau of Labour Statistics using different criteria, but the most widely used is the one which measures the number of people who are jobless but actively seeking employment.

Unemployment rate and labour market’s weakness, not always go together

There are several reasons the unemployment rate rises or falls. Although a clear reason is a change in the number of job seekers, the unemployment rate may also be affected by a change in the size of the labour force. When workers become discouraged and stop looking for employment, they leave the labour force. It is common in economic downturns for the labour force to decrease (or increase more slowly than usual) in size as many give up on finding work and are therefore no longer counted as officially unemployed. For that reason, economists often point out that the unemployment rate is misleading and understates the labour market’s weakness. Conversely, during an economic recovery, high unemployment rates can persist despite an increase in jobs as more workers begin looking for work and re-enter the labor market.

Unemployment rate in 2020

At the end of April 2020 the unemployment rate was 14.7%, 10.3% higher than March, due to the coronavirus pandemic and its economic impact, according to the Bureau of Labour Statistics. The number of unemployed people increased by 15.9 million to 23.1 million. 5.8% is the average U.S. annual unemployment rate from 1949 through 2019, according to the BLS.

The Labour Force Participation Rate vs. the Unemployment Rate

While the LFP rate takes into account the entire working age population, the national unemployment rate focuses only on the people in the workforce. It reflects the number of unemployed people as a percentage of the labour force.

In other words, as a June 1 Investopedia article sums it up: “The LFP rate refers to the percentage of people age 16 and older who are in the labour force. The unemployment rate refers to the percentage of people in the labour force who don’t have jobs but are actively seeking work.”