How Labor Force Participation Rate Affects U.S. Unemployment

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One of the main indicators affecting the Federal Reserve’s determination of whether oregon not to rise involvement rates is the unemployment rate. During periods of beardown economical maturation and falling unemployment, the Fed is much apt to rise involvement rates to chill wage maturation and support a lid connected imaginable inflation. However, officials are much apt to little rates during periods of weakening economical enactment and rising unemployment to spur economical growth.

Yet, unemployed radical uncovering caller jobs is not the lone mode successful which the unemployment complaint tin fall. It tin besides autumn due to the fact that immoderate of the unemployed are nary longer looking for enactment and person dropped retired of the labour unit altogether. If so, past a falling unemployment rate is not needfully an indicator of renewed economical strength, but could bespeak structural weakness wrong the job market.

Key Takeaways

  • The unemployment complaint is simply a deciding origin for the Federal Reserve erstwhile mounting involvement rates.
  • Higher levels of unemployment mightiness motivate the Fed to little rates and spur economical growth, portion debased levels of unemployment mightiness motivate higher rates to curb inflation.
  • While the comparative level of unemployment is important, the labour information complaint is simply a origin arsenic well.
  • Labor information considers radical that person stopped looking for enactment and represents numbers that are not captured successful unemployment complaint statistics.
  • A debased labour information complaint tin hint astatine structural weakness successful the occupation market.

Understanding Unemployment Statistics

In bid to recognize however the unemployment complaint is affected, it is important to cognize however it is calculated. The U.S. Bureau of Labor Statistics (BLS) classifies each persons implicit the property of 16 arsenic “unemployed if they bash not person a job, person actively looked for enactment successful the anterior 4 weeks, and are presently disposable for work.”

The labour unit is defined by the BLS arsenic “all persons classified arsenic employed oregon unemployed.” Lastly, the unemployment complaint is past calculated by dividing the full fig of unemployed by the full labour unit and multiplying this fig by 100 to cipher a percent rate. 

Ways Unemployment Rates Can Fall

First, the astir evident mode is that unemployed radical find jobs and go employed. Labor unit participation remains the same, portion the fig of unemployed decreases and the fig of employed increases.

The 2nd mode is that radical not presently counted successful the labour unit go employed. It is ever imaginable for idiosyncratic not actively looking for enactment to judge a occupation offer. As this would origin an summation successful the full labour unit portion the fig of unemployed remains unaffected, the percent of unemployed would decrease.

Discouraged Workers

Finally, the unemployment complaint tin autumn erstwhile those erstwhile considered unemployed halt looking for enactment and permission the labour unit altogether. The BLS defines discouraged workers arsenic radical not successful the labour unit who whitethorn privation enactment and are disposable to enactment but person fixed up looking. While they person looked for enactment sometime successful the erstwhile 12 months, discouraged workers are not counted arsenic unemployed if they person not looked for enactment successful the 4 weeks anterior to the BLS survey.

As some the fig of unemployed and full labour unit alteration successful specified a situation, it whitethorn not beryllium evident that the unemployment complaint really goes down. But considering the astir utmost illustration of each those presently unemployed leaving the labour force, nary substance however debased the full labour unit falls, the unemployment complaint falls to zero.

While the archetypal 2 ways successful which the unemployment complaint could diminution are affirmative signs of economical strength, the last mode is really much indicative of weakness. Let’s look astatine the U.S. concern successful bid to find whether a falling unemployment complaint is simply a motion of spot oregon a motion of weakness.

The U.S. Employment Situation

In 2001, the U.S. unemployment complaint was sitting astatine astir 5%. Over the adjacent mates of years it dipped beneath 5%, reaching a debased of 4.4%, earlier opening to emergence aft the global fiscal crisis successful 2008. After reaching a precocious of 10% successful October 2009, the unemployment complaint steadily fell and, by September 2019, was astatine 49-year lows of conscionable 3.5%.

This inclination changed dramatically successful 2020 owed to the COVID-19 pandemic and the unemployment complaint rapidly roseate to 14.8% successful April. However, by the extremity of 2020 and into 2021, the unemployment complaint steadily decreased, registering astatine 5.9% successful June 2021.

Yet, the supra treatment connected however the unemployment complaint is calculated, and factors that could impact its fall, should beryllium crushed capable to beryllium somewhat skeptical of utmost unemployment numbers. In fact, determination is different inclination that makes the crisp diminution successful the unemployment complaint look a batch little rosy.

Labor Force Participation Rate

Since astir the mediate of the 1960s until astir the twelvemonth 2000, the labor unit information rate—labor unit divided by the noninstitutionalized, civilian working-age population—rose alternatively dramatically from conscionable nether 59% to much than 67%. One of the main contributors to this emergence was the expanding complaint astatine which women were joining the labour force. However, the complaint fell steadily from the 66% to 67% levels seen until precocious 2008 successful the aftermath of the planetary fiscal crisis.

While galore economists reason that this alteration successful labour information since 2008 is partially owed to galore of the babe boomer procreation starting to discontinue and leaving the labour force, the premier moving property (25 to 54 years) labour unit information complaint has besides declined. In January 2021 it declined to 76.4% compared to 81.8% successful the twelvemonth 2000. Thus, retiring babe boomers cannot beryllium the sole crushed for the diminution successful the wide labour unit information rate.

The information that immoderate radical successful their prime moving age person near the labour unit is much of a apt denotation of a weakness successful the U.S. labour market. One mentation is that determination is simply a skills-to-qualifications mismatch. Thus, contempt the fig of radical who mightiness privation a occupation and are disposable for work, if they don’t person the skills that employers are looking for, they won’t get hired. Another mentation is the fig of discouraged workers who person near the workforce owed to circumstances surrounding the COVID-19 pandemic.


The fig of discouraged workers successful the U.S. successful June 2021, up from 565,000 reported successful April 2021.

The Bottom Line

While it whitethorn beryllium tempting to deliberation that a driblet successful the unemployment complaint is simply a affirmative sign, the precise constrictive explanation of the officially unemployed is grounds that the mentation of unemployment complaint trends is not unambiguous. One besides needs to see the labour unit information rate. If the unemployment complaint is falling due to the fact that radical person fixed up connected trying to find a occupation alternatively than really uncovering a job, this whitethorn beryllium grounds of a weakening system and whitethorn beryllium crushed capable to interaction the Fed's monetary policy decisions.

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