Labor Force Participation Rate and Why It Won't Improve
Five Reasons Why Workers Dropped Out and Won't Come Back
The Labor Force Participation Rate is how many people are available to work as a percent of the total population. In May 2018, it was 62.7 percent.
Here's how to calculate the Labor Force Participation Rate.
LFPR = Labor Force / Civilian Non-Institutionalized Population
where the Labor Force = Employed + Unemployed
To calculate the formula correctly, you must first understand the underlying definitions outlined by the Bureau of Labor Statistics.
The BLS is the Federal agency that reports on the labor force and its participation rate every month in the Jobs Report. Here they are:
Civilian Non-institutional Population - Everyone living in the U.S. who is 16 or older MINUS inmates of institutions such as prisons, nursing homes and mental hospitals and MINUS those on active duty in the Armed Forces.
Labor Force - Everyone who is classified as either Employed or Unemployed.
Employed - Anyone aged 16+ in the civilian non-institutional population who worked in the last week. That means they worked an hour or more as paid employees or 15 hours or more as unpaid workers in a family-owned business or farm. It also includes those who had jobs or businesses, but didn't work that week because they were on vacation, sick, were on maternity or paternity leave, on strike, were in training, or had some other family or personal reasons they didn't work.
It doesn't matter whether it was paid time off or not. Each worker was only counted once, even if they held two or more jobs. Volunteer work and work around the house did not count.
Unemployed - Those age 16 or more who weren't employed, but were available for work and actively looked for a job within the past four weeks.
People who were only waiting to be recalled to a job from which they had been laid off were counted as unemployed, even if they didn't look for work. Contrary to popular belief, it has nothing to do with the number of people who applied for or receive unemployment benefits. Instead, this figure is derived from a BLS survey. Here's more on the definition of unemployed.
People who would like work, but haven't actively looked for it in the last month are not counted as being in the labor force no matter how much they want a job. They are counted in the population, however.
The BLS does keep track of them. It calls some of them "marginally attached to the labor force." These are people who have looked in the past year but just not in the previous month. They might have had school or family responsibilities, ill health, or transportation problems that prevented them from looking recently.
The BLS calls some of the marginally attached "discouraged workers." That's because they report that they've given up looking for work because they don't believe there are any jobs for them. Others have become discouraged because they lack the right schooling or training. They worry that potential employer thinks they are too young or old.
Some have suffered discrimination. They are counted in the real unemployment rate.
The other group that isn't included in the labor force are students, homemakers, retired people and those under 16 who are working. They are, however, counted in the population.
Here's how to calculate the labor force participation rate for May 2018.
|Number (in millions)||Percent|
|Not in Labor Force||95.915|
|Labor Force (LF)||161.539||62.7% of Population|
|Employed||155.474||60.4% of Population|
|Unemployed||6.065||3.8% of Labor Force|
The labor force participation rate increased between 1948 until the late 1990s. From 1948 to 1963, the rate remained below 60 percent. But the rate slowly inched up as more women entered the labor force, breaking 61 percent in the early 1970s.
It rose to 63 percent in the 1980s and reached a peak of 67.3 percent in 2000.
Once the 2001 recession hit, the LFPR fell to 66 percent. It didn't improve throughout the "jobless recovery." The 2008 financial crisis sent the participation rate below 66 percent. It's continued falling ever since. By August 2015, it reached a low of 62.6 percent.
That drop should mean that the supply of workers is falling. Fewer workers should be able to negotiate for higher wages. But that didn't happen. Instead, income inequality increased as average income levels suffered. Workers couldn't compete when jobs were being outsourced. They also couldn't compete with robots. Businesses found it more cost effective to replace capital equipment instead of hiring more workers.
Five Reasons the LFPR Fell and Might Not Get Up
It's unlikely the participation rate will ever return to its 2000 peak. Economists are divided on how much of the recent drop in the LFPR was due to the recession. Estimates range from 30 percent to 50 percent to as much as 90 percent. Even the most conservative estimate says that the recession forced nearly a third of workers out of the labor force.
Many of those workers never returned even once jobs become more available. Here are the five reasons according to research.
Half of the decline is due to the aging of America, according to the Federal Reserve Bank of Atlanta. These demographic changes affected the labor force even before the recession. As baby boomers reach retirement age, they leave the labor force. They don't need a job. Others stay home to care for ailing parents or spouses, or claim disability themselves. Since they represent such a large percentage of the population, that will have a major impact on the labor force participation rate. It's a big reason why it may never regain its past levels, no matter how strong the job market is.
Second, 24 percent of the unemployed have been without a job for six months or more. Only 10 percent of these long-term unemployed find a job each month. It became so frustrating that many dropped out of the labor force. They may never return. They don't have updated skills and employers aren't willing to take a chance with them.
Third, millions who left the labor force were between the ages of 25 and 54. That's prime earning years. Some were students who stayed in school longer. The Atlanta Fed estimated that contributed a 0.5 point drop in the participation rate. Fewer of those students worked while they were in school. But anyone who wasn't employed during their prime earning years may never get a chance to recover their careers.
Despite improving job opportunities, some older workers were unable to return to the labor force. That's called structural unemployment. That's when the skills of would-be workers no longer match what employers need. The Federal Reserve Bank of Kansas found that demand for middle-skilled jobs has declined between 1996 and 2016. Middle-skilled jobs involve routine tasks that are easier to automate. Demand has increased for both low-skilled service jobs and high-skilled analytical or managerial positions. Both of those are more difficult to replace with a machine or computer.
Fourth is the increased use of opioid medication. Almost half of prime age men not in the labor force take pain medication daily to treat chronic health conditions. Two thirds of them are on prescription meds. A study by Yale professor Alan Krueger shows how this affected the LFPR. He estimates that, from 1999 to 2015, 20 percent of the LFPR decline for these men was caused by opioid dependency. Another study found that one million people are heavy users of opioid drugs. That's 0.5 percent of the labor force. It cost the economy $44 billion a year. It slowed economic growth by 0.2 percent.
Fifth, is the increasing number of people too sick or disabled to work. For example, 13.2 percent of those aged 56 - 60 cite that reason for not being in the labor force. The Atlanta Fed found it contributed 0.6 percent of the decrease in the LFPR. The level of sickness was highest in Mississippi, Alabama, Kentucky, and West Virginia. The two biggest illnesses were diabetes and high blood pressure.