The Bottom Line
- There’s been an important shift in the U.S. labor market in recent years; the percentage of working age Americans who are employed or seeking work has shrunk.
- That figure, known as the labor force participation rate1 is currently 62.8%—down from 67.3% in 2000.2
- One of the common explanations is the huge numbers of baby boomers who have opted for retirement. While that’s certainly a factor, it doesn’t tell the whole story.
- In fact, as the chart illustrates, the labor force participation rate of people aged 65 years and over has actually increased—while the rate for those aged 25-34 years has declined.
- Why? There are numerous reasons, but inadequate retirement income for the older group and a lack of good job opportunities for the younger group are obvious factors.
- Why is it important to understand the labor force participation rate? Because it directly affects the unemployment rate, which influences a broad spectrum of economic decisions.
- The unemployment rate compares the number of people without work who are seeking full-time employment with the size of the labor force. Any trend that pushes down the size of the labor force has the effect of pushing the unemployment rate lower.
- That helps explain why the Federal Reserve is being so cautious about raising interest rates even when a 4.9% unemployment rate suggests a fairly tight labor market, which to the Fed is a catalyst for future inflation, because of its potential to drive up wages as the pool available workers shrinks.
- However, if a significant number of available potential workers who aren’t now considered part of the labor force—known as “labor market slack” to economists—were to suddenly decide to seek jobs that would move the unemployment rate higher.
- Therefore, the Fed is possibly being cautious about viewing a 4.9% unemployment rate with a 62.8% participation rate in the same light as it would if the participation rate was at a higher level.
1 The labor force participation rate refers to the percentage of the economy’s labor force that is employed or actively looking for work. The labor force includes all persons in the civilian noninstitutional population classified as employed or unemployed; the civilian noninstitutional population includes people 16 years or older that are not in the military or institutionalized.
2 Source for all data is Bureau of Labor Statistics via Bloomberg.