Definition and Examples of Labor Force Participation Rate
The labor force participation rate measures the amount of labor in an economy.
Labor is one of the factors of production. The other three factors of production are natural resources, capital, and entrepreneurship.
The LFPR shows how many people over the age of 16, aside from those living in institutions, are working or looking for work.
How To Calculate the Labor Force Participation Rate
The labor force participation rate formula works like this: Take the total labor force (employed plus unemployed) and divide it by the total civilian noninstitutionalized population.
How the Labor Force Participation Rate Works
To calculate the formula correctly, you must understand how the Bureau of Labor Statistics (BLS) defines "labor force" and other key terms. The BLS is the federal agency that creates the monthly Job Reports on the labor force and its participation rate.
The labor force is everyone classified as either employed or unemployed.
The employed is a group made up of the civilian noninstitutional population age 16 or older who in the last week worked at least an hour or more as paid employees. It also counts those who worked 15 hours or more as unpaid workers in a family-owned business or farm. Each worker is only counted once, even if they hold two or more jobs.
The employed also includes those who had jobs or businesses but didn't work that week due to vacation, illness, strike, training, maternity or paternity leave, or another family or personal reason, whether the time off was paid or not.
The unemployed includes those age 16 and older who are available for work and who have actively sought a job within the past four weeks but aren't employed. It also includes people who have been laid off and are waiting to be recalled to a job.
The monthly unemployment rate is different from the number of people who applied for or received unemployment benefits.
The civilian noninstitutional population refers to anyone living in the U.S. who is 16 or older, with the exception of those who are in the active-duty Armed Forces and those who live in nursing homes, prisons, jails, mental hospitals, or juvenile correctional facilities.
History of the Labor Force Participation Rate
The U.S. labor force participation rate rose from 58.6% in January 1948 to a peak of 67.3% in January 2000. This dramatic increase was caused by a few demographic trends. First, the big boom of babies born after World War II became old enough to enter the labor force. At the same time, a higher percentage of women sought careers. In the 1990s, more Latino workers entered the workforce.
After the 2000 peak, three recessions over the next 20 years caused many people to drop out of the labor force, some permanently. The recessions coincided with the retirement of Baby Boomers and other demographic trends.
The 2001 recession lowered the LFPR to 65.9% in April 2004. It never returned to the 2000 peak. The 2008 financial crisis sent the participation rate down to 62.4% by September 2015. By January 2020, it had only risen to 63.4%.
The 2020 recession sent the LFPR down to 60.2% in April 2020 as millions of people were laid off or furloughed. This was the lowest level since January 1973, when it was 60.0%.
Below you can see the seasonally adjusted civilian labor force participation rate over the last two decades. It also shows the massive drop since the financial crisis and its slow recovery. It also shows the drop in April 2020 due to the pandemic.
Why the Labor Force Participation Rate Declined
The Great Recession saw high levels of unemployment but researchers found that, even as the labor market recovered in the decade after the crisis, many workers who left jobs never returned even once jobs became more available. Demographic changes affected the labor force even before the recession.
According to the Council of Economic Advisors, half of the decline in labor force participation between 2007 and 2014 was due to the aging of America.
As baby boomers reach retirement age, they leave the labor force. Others stay home to care for ailing parents or spouses or claim disability. Baby boomers had a major impact on the labor force participation rate because they represent such a large percentage of the population. This is also why it may never regain its past levels, no matter how strong the job market is.
Men Ages 25 to 54 Leaving the Labor Force
A significant number of working-age men have also left the labor force. In 1954, 98% of men aged 25 to 54 were in the labor force. By 2017, that had fallen to 88%. This is one of the lowest rates of prime-age men in all developed countries.
The drop-off is worse among men without a college degree. The percentage of people with at least a college degree rose from 33% in 1947 to 84% in 2000. With less demand for nondegreed men, the wages are much lower. Wages fell by 15% for these men between 1973 and 2016. Many manufacturing jobs that these men relied on have either been outsourced or replaced by technology.
"Discouraged workers" are those who reported giving up looking for work because they don't believe there are any jobs for them. Others become discouraged due to a lack of the right schooling or training. Discouraged workers aren't counted in the headline unemployment rate but are counted in the real unemployment rate.
Jobs Leaving the Market
According to the Organisation for Economic Cooperation and Development (OECD), the demand for middle-skilled jobs, which involve easily automated routine tasks, has declined. The Covid-19 pandemic and resultant economic slowdown impacted different employees differently, but deepened the skill, wage and geographic divide.
Structural unemployment occurs when the skills of would-be workers no longer match what employers need. So despite improving job opportunities, some older workers were unable to return to the labor force.
Almost half of the prime-age men not in the labor force take pain medication daily to treat chronic health conditions. Two-thirds of them are on prescription medication, including opioid medication.
Yale professor Alan Krueger showed how opioids affected the LFPR. He estimates that from 1999 to 2015, 20% of the LFPR decline for these men was caused by opioid dependency. The National Institute on Drug Abuse reports that in 2017, 1.7 million Americans were addicted to opioids.
Poor Health and Disability
The Atlanta Fed found that Alabama, Louisiana, and Mississippi had especially low labor force participation rates. People in these states report they are too sick or disabled to work. Leading causes of U.S. death and disability include chronic diseases such as heart disease, cancer, and diabetes.
- To find the labor force participation rate formula, divide the total civilian noninstitutional population by the number of people who are working or seeking work.
- The peak labor force participation rate was 67.3% in January 2000.
- Many factors, including recessions and an aging population, have dragged the rate down from its peak.