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Duration: 4:16

Level: Beginner

The Labor Force Participation lesson discusses where to find it, how to forecast it, how it’s influenced, and how it influences financial markets and the economy. Broadly speaking, it can point to American’s sentiment regarding the labor market and the potential for changes in wage growth. When assessed along with other key data points, labor force participation can influence investor sentiment and is an important aspect of the economy’s productivity.

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Study Notes:

The labor force participation rate, which is provided by the Bureau of Labor Statistics, is important for assessing labor market conditions and the strength of the overall economy, especially when used with other data, such as wages, job creation and the unemployment rate. Broadly speaking, it can point to American’s sentiment regarding the job market and the potential for changes in wage growth. It’s released within the Jobs Report, on the first Friday of each month at 8:30am eastern time.

The labor force participation rate is the percentage of the working age population that is in the labor force. The Bureau defines the working age population as individuals older than 16 who are not active military members or not institutionalized. For determining the total labor force, the Bureau counts employed individuals and individuals actively seeking employment. To be considered employed, individuals must have worked at least one hour during the survey period or be on vacation or sick leave. Unemployed individuals who are awaiting to return to work after a layoff or are actively seeking work are also included in the labor force. The Bureau then calculates the labor force participation rate by calculating the labor force as a percentage of the total working age population.

The labor force participation rate, declines when individuals stop looking for work because those individuals are still included in the working age population. With that in mind, the labor force participation rate can help determine if changes in unemployment are due to a strong labor market or fewer individuals actively seeking work.

Labor force participation can show that unemployed individuals have given up on looking for work, which implies weakening sentiment about the economy. Additionally, low labor participation can imply potential for wage inflation. For example, if employers are creating new jobs but more members of the working age population aren’t joining the labor force, then competition for workers may result in wage pressures. Additionally, employers who can’t recruit new employees may face limits on increasing their production.

When assessing the labor force participation rate, demographics and other factors should be considered. For example, through the 1950s, the labor force participation rate ranged from approximately 58% to 60%. As women increasingly entered the workforce, the rate increased to around 67% as of the late 1990s.

The COVID-19 pandemic also impacted the labor participation rate because it reduced the number of families in which both parents work. As schools closed to reduce the spread of COVID-19, parents needed to stay home to take care of their children. Additionally, some workers who became sick with COVID-19 decided to retire rather than return to work. Other individuals with long-haul COVID-19 have been too ill to return to the workforce.

Overall demographics are another factor with the baby boomer generation experiencing increasing rates of individuals leaving the labor force upon reaching retirement age against the backdrop of dwindling birth rates.

The labor force participation rate is released as part of the broader labor report that discusses jobs added, wages and unemployment. When assessed along with those data points, labor force participation can influence investor sentiment and is an important aspect of the economy’s productivity.

 

Additional Resources

Most recent Jobs Report

Labor Force Participation explained


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