What is Labor Force Participation Rate Analysis?
The labor force participation rate analysis calculates the percentage of the working-age population either employed or actively seeking work. It can be anyone in the age category of 16 to 64, on the condition that they are not institutionalized. A high labor force participation rate shows that more people are employed and contributing their wages to the economy, making it a healthy economy. It also shows that there are more people actively looking for employment leading to more hiring options for employers. On the other hand, a low labor force participation rate shows a low number of people employed or looking for work. This leads to an economic setback with fewer wages going into the economy. In such a scenario, employers might have to cut back on profits, lay off employees, or stop the process of hiring.
Federal Bureau of Labor Statistics
According to the federal Bureau of Labor Statistics (BLS), the participation rate of the U.S. as of November 2020 was 61.5%. The BLS monthly data reports that the participation rate figures for the U.S. since 2013 have been around 63%. This increase in the participation rate came after the sharp decline brought about by the Great Recession. August 2020 reported 13.6 million unemployed people. Compared to the unemployed number of 7.6 million in 2019, data showed an increase of 6 million unemployed in one year.
Interpretation of the Labor Force Participation Rate Indicator
The labor force participation rate indicator has a central role to play in the analysis to determine the composition and size of a country’s human resources. It is also an indication of the future supply of labor making it easy to make employment projections. The labor force participation rate is used to formulate policies regarding employment. This helps determine whether the labor force needs training, to calculate the expected working lives of the male & female population, and retirement from all economic activity. This information is vital to financially plan out the social security systems.
The labor force participation rate indicator also helps understand the labor market behavioral patterns of the different population segments. Each category differs from the other in terms of employment opportunities and the income demanded. For example, the labor force participation rate of the female population varies with age, marital status, and level of education. Cultural, economic, and sociological factors affect the female force participation rate in all OECD countries. The participation rates differ as per rural & urban populations, and as per different socio-economic groups.
Factors Affecting the Labor Force Participation Rate
Many external factors can affect the labor force participation rate. These factors are not in the control of the employers.
Recession : Periods of economic decline or recession can have a long-lasting effect on the labor force participation rate. Economic decline leads to less money getting pumped into the economy, which in turn sees companies laying of the labor force or halting the hiring process.
Outsourcing : Contracting work to external workers from overseas, also known as outsourcing, leads to lesser jobs available in the U.S.
Long-term unemployed : Extended periods of unemployment can make job seekers completely give up looking for work. Once a person stops looking for work actively, they cannot be a part of the labor force participation rate. Such phases of unemployment generally follow a recession.
Natural disasters : Large-scale natural disasters like earthquakes, floods, hurricanes can affect the labor force participation rate. This applies to a state or a city on a micro-scale, for example, Hurricane Katrina caused massive devastation in New Orleans, and businesses took a long time to recover from it.
Cultural shifts : Shifts in societal roles can bring about massive changes in the labor force participation rate. For example, during World War II, a large number of female labor forces joined work to fill up positions left empty by the men at war.
Labor force :Though on a smaller scale but labor force factors impacts the labor force participation rate –
- Population – A higher population means a higher rate of labor force participation. More people create more demand for goods and services, leading to the generation of more job opportunities.
- Income – Workers often seek out better-paying jobs and are ready to move to avail those opportunities. The higher average income of a state creates attractive job opportunities for people.
- Education – a population with a higher level of education has a higher rate of labor force participation.
- Homeownership – Home-owning populations have a lower rate of labor force participation. Homeowners are generally not inclined to move for jobs.
- Age – The labor force participation rate can drop with retiring populations.
How to Calculate the Labor Force Participation Rate?
To determine the profile of the labor force distributed in a country, it is broken down by age groups and sex. Statistics from national sources calculate the labor force participation rate based on age and sex, education, and urban or rural areas.
Calculation of the labor force participation rate (LFPR):
LFPR = Labor force (employed workers or workers seeking jobs) / Working-age population (non-institutionalized)
The surveys cover all working categories and economic sectors and include the workers contributing to the family, multiple jobholders, self-employed, and casual workers. The whole non-institutionalized population of a country is surveyed to collate data. Population censuses are a big source of collecting data but do not allow for in-depth probing of the respondents.
Global Labor Force Participation Rate
The global labor force participation rate has shown a decline since 1990. As per the World Bank, the global participation rate in 2019 had declined steadily to 61.2% from 62.7% just a decade earlier. The countries of Madagascar, Qatar, Rwanda, Zimbabwe, Tanzania, and Nepal showed the highest labor participation rate at the end of 2020. While the countries of Algeria, Tajikistan, and Jordan showed the lowest labor force participation rate.
COVID-19 and the Labour Force Participation Rate : The Coronavirus pandemic saw the loss of employment and rising inactivity in 2020. Global employment losses measured 71%, and the increase in inactivity reached 81 million. The impact of COVID-19 resulted in a 2.2 % reduction in the labor force participation rate reaching 58.4% in 2020.
The Effect of the Labor Force Participation Rate on the Economy
The overall economy suffers negatively with a decline in the labor force participation rate. As per research published in 2017 by the Federal Reserve Bank of Philadelphia, a decline in the labor force participation rate results in a slowing down of the GDP growth. This is due to lesser people contributing towards the goods and services output of the country. A decline in the labor force participation rate also leads to an increase in the tax rates. The statistics of the labor force participation rate are significant to evaluate the overall health and well-being of the labor market. Understanding the changing trends of the labor force participation rate will help understand its potential impact on the economy.
Summarizing the Labor Force Participation Rate
Employment : People in employment are those who are above a particular age and are in paid employment for a given period. Employed people draw wages or salaries in cash and sometimes in kind for jobs rendered in the specified period. Employed people can either hold formal jobs or be self-employed.
Payroll : Payroll comprises the paid employees of a company. Payroll is also the total amount of money paid to the employee by the employer. The function of payroll in the business setup is to develop an organization’s pay policy around job benefits like flexible work hours and leave encashment policies.
Unemployment rate :The unemployment rate is a calculation of the percentage of unemployed people that make up the labor force. The labor force is the total number of employed and unemployed people in the community. The unemployment rate can be derived when the number of unemployed people is divided by the labor force and multiplied by 100.
Discouraged workers : Discouraged workers are unemployed people who have given up on seeking jobs, but will take up work up if offered. Discouraged workers are not counted as a part of the labor force.
Common Mistake : Not everyone out of work can be called unemployed. To be unemployed, a person has to be without work but willing to take up a job if offered. The unemployed person should be a job-seeking person. However if a person is out of work and not seeking any work, then they are not considered unemployed.
Context and Applications
This topic is significant in the professional exams for both graduate and undergraduate courses :
- BA Economics
- BA Economics Honors
- MA Economics
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