Understanding the Labor Participation Rate

By Richard Works and Angela Sewell

Economists use labor market data to evaluate how well an economy is using its most valuable resource—its people. Some people, however, argue that official measures are restrictive and do not adequately capture the breadth of labor market issues. To address the concerns with employment numbers, the Bureau of Labor Statistics provides alternative measures of labor underutilization published monthly in The Employment Situation. This article will discuss the most common statistics: the labor force participation rate and the unemployment rate. Collectively, these will provide a picture of the labor market situation. In addition, this article will discuss how HR activities may improve employment statistics, and thus the economy. Please note, any suggestions made in this article only reflect the opinion of the authors, and not necessarily the position of their respective employers.

What exactly makes up the unemployment and labor force participation rates, and what do they actually mean?

The labor force participation rate is the proportion of the civilian noninstitutional population that is working, or looking and available for work. Table 1 provides the statistics for December 2016. The labor force participation rate is calculated by dividing the labor force number (159,640,000) by the civilian noninstitutional population number (254,742,000). This produces the rate in decimal format. The unemployment rate, on the other hand, is the number of unemployed individuals as a percentage of the labor force. Therefore, the unemployment rate is calculated by dividing the unemployed number (7,529,000) by the labor force (159,640,000). A lesser-known statistic is the employment-population ratio. This is calculated by dividing the employed individuals (152,111,000) by the population (254,742,000) in the example from Table 1. In like manner, one could calculate the unemployment-population ratio by dividing the unemployed individuals by the population, which would be 2.9% for December 2016.

Table 1. Employment status of the civilian noninstitutional population,1 December 2016
Category Number (thousands) Percent
Population (P) 254,742
Labor Force (LF) 159,640 62.7% of P
Employed 152,111 59.7% of P
Unemployed 7,529 4.7% of LF
Not in labor force 95,102  
1. Persons 16 years or older residing in the U.S. not in correctional facilities, long-term care hospitals, or nursing homes, or on active duty in the military.

Source: U.S. Bureau of Labor Statistics

What people are counted in these statistics? Individuals are considered employed if they perform any work for pay. The unemployed are those without work, but who make themselves available and are actively seeking employment. Actively looking for work may consist of contacting employers or employment centers to inquire about vacancies, submitting resumes or applications, and having interviews. Any means of active job search qualifies an individual to be counted in the labor force. Individuals who are unemployed and not looking for work are not considered to be in the labor force. These individuals may be students, retirees, or those with family responsibilities preventing them from being in the labor force. Some may also simply not want to work, or may be discouraged by thinking there is nothing available for them due to various factors. Common factors may include a lack of experience or training, prior prolonged periods of unsuccessful job searches, and discrimination.

What is the primary source for the underlying data that make up these statistics? Each month, the Census Bureau conducts the Current Population Survey, which consists of a 60,000-household sample that is representative of the United States population. This sample roughly consists of 110,000 individuals. A quarter of the sample changes on a monthly basis, such that no household is interviewed more than four consecutive months. This results in 75 percent of the sample remaining constant from month to month, and half of the sample remaining constant from year to year. All interviews follow the same procedures, and the status of an individual is determined by how they respond to a specific set of questions. Once the data is collected, the responses are weighted to population estimates from the Census Bureau. These procedures reduce the possible sampling error so that the total unemployment picture is not distorted.

Figures 1 and 2 show the labor force participation rate and the unemployment rate, respectively, from 2001 through 2016. The data show that the labor force participation rate experienced a slow but steady decline. However, there appears to be two separate periods: Figure 1 shows that the second period (2009-2016) had a more drastic decline when compared to the first period (2001-2009). The labor force rate decreased 2 percent between January 2001 and December 2008, and 4.5 percent between January 2009 and December 2016. In much the same way, the unemployment rate during this pivotal period drastically increased from 5 percent in April 2008 to 10 percent in October 2009. No doubt the subprime mortgage financial crisis of 2008 and subsequent recession had an adverse effect on both the labor force participation and unemployment rates. Toward the end of the Obama administration, unemployment levels were back to the levels seen in the Bush era.

While ending unemployment levels were fairly equal between the Bush and Obama administrations, labor force participation declined. To compare the stats, labor force participation was 67.2 percent in January 2001 with 4.2 percent unemployment, and 62.7 percent in December 2016 with 4.7 percent unemployment. A high participation rate with a low unemployment rate suggests a strong job market, because people are either working or looking for work, with few unemployed. However, labor force participation has been on the decline for a decade, and a continuation is expected. Current labor force projections suggest a declining participation rate through 2024. Table 2 shows projections for aggregate sex and select race categories. Data show that overall participation is expected to be 62.1 percent in 2018 and decrease to 60.9 percent six years later. The decrease is expected to be larger for men than for women, and larger for Whites when compared to Blacks, Asians, and Hispanics.

Table 2. Labor Force Participation Rate projections (in percent)
Category

2018

2020

2022

2024

Aggregate

62.1

61.7

61.3

60.9

Men

68

67.4

66.8

66.2

Women

56.6

56.3

56.1

55.8

White

62.2

61.7

61.2

60.8

Black

60.7

60.4

60.1

59.7

Asian

63.4

63.2

63.1

63

Hispanic

66.1

66.1

66

65.9

Source: U.S. Bureau of Labor Statistics

Aggregate age categories show that young people are expected to have a substantial decrease in labor force participation. Projections suggest individuals between 16 and 17 years old are expected to have a participation rate of 18.2 in 2018 and 13.5 in 2024 (see Figure 3). The fluctuation for individuals in their prime working ages varied in the lower percentages, and therefore was not included in Figure 3. If the Trump administration wants to improve the overall outlook, it may need to focus on increasing the number of people employed to decrease the unemployed population. On the other hand, projections for older individuals suggest an increase in labor force participation. Individuals between 75 and 79 years of age are expected to increase their labor participation from 12.6 percent in 2018 to 14.4 percent in 2024. Even individuals 80 years of age and over are expected to increase. Research suggests this will stem from delayed retirements.

Some age groups are projected to stay constant or slightly increase. Individuals between 24 and 54 are projected to have steady participation between 2018 and 2024, and individuals between 55 and 69 should experience a slow increase (additional projections are available at BLS.gov). However, the most important factor is jobs. Without an increase in jobs, an increase in labor participation will only increase the unemployment rate. In addition, potential workers should prepare for the changing job market. For HR professionals, additional outreach activities may increase awareness of job openings to talented individuals within the community. For example, interested graduates may be available, but unaware of opportunities within an establishment. Enhanced communication is mutually beneficial. On the other hand, firms often struggle with efficiency and funding: little money to employ, to provide attractive benefits, and to address market competition. Thus, hiring of illegal or undocumented aliens appears to be incentivized. Therefore, sustainable job creation strategies should also benefit employers.

According to the 2016 Jobs Outlook Survey conducted by the Society for Human Resource Management, 58 percent of HR professionals were confident in the job market and expected growth. The Society’s employment indicators anticipated a net of 41.7 and 26.2 percent of manufacturers and service-sector companies, respectively, to add jobs in January 2017. However, HR professionals report facing challenges with recruiting conditions and talent management. The indicators suggest recruiting difficulty increased in the services sector, but dropped in the manufacturing sector, with new-hire compensation declining for both. In addition, compensation costs increased for civilian and private industry workers in December 2016, according to the January release of the Employment Cost Index. Collectively, these data suggest expected job growth from HR professionals combined with increasing costs to employers and more difficult talent management.

So what gives? With the new administration’s ambition to add jobs, employers may face increased costs that could jeopardize operations if demand for goods and services is not increased to offset higher wages. Likewise, if employment is made available without anyone willing or qualified to fill the vacancy, another level of complexity is added. However, HR professionals seem confident in the job market ahead. The collective goal of everyone should be to address the issue with declining labor force participation as part of job creation strategies. But what can we do? The authors propose corporate social responsibility efforts connected with schools (high schools, colleges, trade schools, etc.). This will expand awareness of employment opportunities with qualified people. In addition, these efforts may encourage the current workforce to increase productivity. However, there still exists potential tax and health care issues that are beyond our control. These may be a focus of the new administration.

Angie Sewell, SPHR, SHRM-SCP Lonza, Inc. – Charleston, TN angela.sewell@lonza.com www.lonza.com

Angie Sewell, SPHR, SHRM-SCP
Lonza, Inc. – Charleston, TN
angela.sewell@lonza.com
www.lonza.com

Dr. Richard Works, Economist Bureau of Labor Statistics – Washington, DC works.richard@bls.gov www.bls.gov

Dr. Richard Works, Economist
Bureau of Labor Statistics – Washington, DC
works.richard@bls.gov
www.bls.gov