fedgazette Roundup (2011-2015)

The missing unemployment link: Labor force participation rates

Brian Holtemeyer

Published January 11, 2012

In today’s economy, many common economic relationships are feigning cognitive dissonance. For example, since peaking at over 10 percent in 2009, the nation’s unemployment rate has dropped by 1.5 percentage points. Despite this apparent improvement, the total number of employed workers has changed little.

The unemployment rate is calculated by the number of unemployed people divided by the labor force. The November unemployment rate was 8.6 percent, down from a high of 10.1 in October of 2009. Over this period, the number of unemployed fell almost 15 percent (2.3 million workers), to 13.3 million. Over the same period, the number of employed people grew by less than 2 percent (also 2.3 million) to 140.6 million (see Chart 1).

LFP Ch. 1 -- 1-9-12

The missing piece of this employment puzzle is those workers who have left the workforce altogether. A person is considered out of the labor force if he or she hasn’t searched for work over the past four weeks, even if he or she wants a job. From October 2009 to November 2011, the civilian population age 16 and over that was not in the labor force rose by almost 4 million, to 86.6 million.

That’s why economists are looking to labor force participation (LFP) rates—the percentage of people 16 and older who are working or looking for work—for more clues to the employment market and the overall health of the economy. Chart 2 shows that the LFP rate since the end of the recession has trended consistently downward, while the unemployment rate has seen steady improvement.

The unemployment rate would be much higher if people who left the labor force had instead continued searching for a job. For example, if labor force participation rates had held steady at recession-ending levels (instead of decreasing subsequent to the recession), unemployment would be about 11 percent (see Chart 3).

LFP Ch. 2-3 -- 1-9-12

Reasons behind the recent decline in labor force participation remain murky. Three factors that have contributed to the decline are an aging baby-boomer population reaching retirement age, people leaving the labor force to return to school, and an increase in discouraged workers no longer actively searching for a job. But these factors appear to account for only part of the recent decline; what accounts for the rest of the drop remains the subject of ongoing research.

However these factors stack up, the improvement in unemployment is largely the work of declining LFP rates and (unfortunately) not job growth.

This post was updated on Feb. 6, 2012