The Labor Force and Its Impact on the Economy

Are You Officially in the Labor Force?

Labor force
If you're working, you're in the labor force. Photo: Erik Isakson/Getty Images

Definition: The labor force is the part of the civilian noninstitutional population who is either employed or unemployed. It is the number of people who are either working or looking for a job.

The Bureau of Labor Statistics uses a very precise definition. The civilian noninstitutional population is anyone not in the active military force or an institution. That includes jails, nursing homes, and halfway houses.

The BLS only counts those who are 16 or older as employed. They must have worked during the past week, unless they were sick or on vacation. It includes those who work for wages and the self-employed. It also includes those who work for a family business. 

It only counts as unemployed those who have actively looked for a job in the past four weeks. 

Who Is Not In The Labor Force

There are four groups of people who are not in the labor force. First, are those who are under 16 even if they are working. Second, are those who don't want or need to work. They might be retired, in school full-time, or taking care of family members.

Third, are those who want to work but haven't looked in the past year. Most have a serious health issue, like cancer. They will go back to work once they recover.

Fourth, are those who have looked in the past year, but not in the last four weeks. The BLS calls them marginally attached to the labor force.

 They had school, ill health, or transportation problems that kept them from looking in the past month. Others are "discouraged workers." They don't believe there are any jobs for them. They are willing to work if a job came to them. The marginally attached and discouraged workers are included in the Real Unemployment Rate.

Formulas 

These formulas might help you better understand how the labor force fits into the population according to the BLS.

Population = Civilian noninstitutional population + Active duty military + Institutional population

Civilian noninstitutional population = Labor force + Not in labor force

Labor force = EmployedUnemployed

Not in labor force = Under 16 + Don't  want work + Want work but haven't looked in past month.

How the Labor Force Affects the Economy

The labor force is responsible for the labor in an economy. Specifically, it's one of the four factors of production. The other three are capital goods,  natural resources, and entrepreneurship. They create the supply that meets the demand for goods and services in an economy.

The Labor Force Participation Rate is the labor force divided by the civilian noninstitutional population. This rate typically falls during a recession. That's because people drop out of the labor force. Some are laid off. They use this time to start a family or go back to school. Many seniors take early retirement. As the economy returns to healthy growth, the labor force participation rises again.

The contribution of the labor force to the output of labor depends on its productivity.

That measures how much each worker contribute to goods and services. One reason for robust U.S. economic growth throughout most of its history is due to productivity. Until the 1920s, productivity increased 2 percent annually. During the 1920s, it increased 5 percent each year thanks to manufacturing. Between the 1940s to 1973 it increased 1.5 percent to 2 percent a year. The late 1990s also saw 1.5 percent growth, thanks to the internet. Productivity also increased after the Great Recession, but that was because employees who weren't laid off had to pick up the slack. (Source: "Productivity," Bureau of Labor Statistics.)

Usually, better productivity leads to higher wages. That stopped between 2000 and 2012. In fact, income fell 6.6 percent per average household after inflation is taken into account.

That puts additional pressure on people to drop out of the labor force. They may go back to school to get higher-paying positions. Coupled with forced higher productivity, it became very discouraging for many people to look for a job.

Another labor force trend is aging. In 2006, only 15 percent of the labor force was older than 55. By 2022, it will increase to 25 percent of the work force. They will be holding service sector jobs, not executive positions. Many of them are working because they must. They lost their retirement savings in the 2008 financial crisis. Others are semi-retired and looking for positions to fill their time. Regardless of the reason, they are taking jobs that used to be held by younger people. That makes it even harder for those just out of high school or college to get the entry-level position needed to start their career.  For more, Why Boomers Won't Retire.

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