The Unemployment Rate vs. the Labor Force Participation Rate
Have you ever noticed that even though presidents quote that the unemployment rate is low, there seems to always be many people who are out of work? That's because there is a discrepancy between those who are employed and those who are no longer participating in the labor workforce. This article will take you on a step-by-step journey of how the unemployment rate and the labor force participation rate are calculated. The equations are quite simple. So don't be concerned; this is not rocket science.
Unemployment Rate vs. Labor Participation Rate
In general, The unemployment rate is a metric that is used to measure the number of people who are unemployed in the labor force.
The labor force participation rate is a measure of the number of people who are both employed and unemployed in the labor force.
Notice that both metrics use the parameter called labor force.
What Is the Labor Force?
As shown in the figure below, the labor force is made up of the following:
- The number of people at least 16 years of age who are employed
- The number of people at least 16 years of age who are unemployed and are still looking for work within the last four weeks, excluding those who are no longer seeking work, retirees, and military personnel.
The unemployment rate is calculated by dividing the number of people employed by the labor force; multiplied by 100 to derive the percentage.
The Labor Force Participation Rate is calculated by dividing the Labor Force by the total adult population that is at least 16 years of age and multiplying the results by 100 to yield the percentage.
Calculating the Unemployment Rate of a Sample Country
To illustrate how the unemployment rate is calculated, the below figure uses a sample country made up of the following:
- Total Adult Population = 1,500
- 800 have jobs
- 200 are looking for jobs
- 200 are retired
- 200 have given up looking for jobs.
As shown in the figure below:
The 800 who have jobs is divided by the labor force of 800 who have jobs, including the 200 who are looking for jobs. The results is 20% unemployment rate.
Calculating the Labor Force Participation Rate (LFPR)
Using the same sample country, we can calculate the LFPR. To do this, we divide the Labor Force by the number of the adult population who are greater than 16 year of age. In this case, the labor force is the same. It is made up of 800 who have jobs including 200 who are looking for jobs. Now, it is divided by the 1500 adults who are greater than 16 years of age. The result is multiplied by 100 to yield a percentage of 66.67 percent who are actively participating in the labor workforce.
Now it should become apparent that the unemployment rate of the sample country was 20 percent, but the labor workforce participation rate is 66.67 percent.
That means the employment rate is at 80%, but out of the total adult workforce, there is a 33.33 percent deficit of those who are not participating.
Do you see the difference? Presidents like to quote the unemployment rate instead of the Labor Force Participation rate, even though both are available from the Bureau of Labor Statistics.
Calculating the Current Labor Force Participation Rate (LFPR)
The following description is based on data from the Bureau of Labor Statistics and was current at the time this article was created. All numbers are in millions. According to the bureau, there are 243 million people in the labor force who are at least 16 years old. 157 million have jobs and 6 million are looking for jobs. To calculate the Labor Force Participation Rate, add the 157 million who have jobs to 6 million who are looking for jobs. That equals 163 million, the number in the labor force; dividing that by the 243 million adults in the working population yields a labor force participation rate of 67%.
If the unemployment rate is at 3.2% that means that 96.8% are working. However, the total adult population of the labor force is at 67%. That means that 33% of the adult working force is not participating in the labor market.
- If the number of retirees increases, the LFPR decreases.
- If the number of people who have dropped out of the labor force increases, the LFPR decreases.
- If the unemployment rate decreases, the LFPR decreases.
Bureau of Labor Statistics Current Statistics
Below are two charts from the Bureau of Labor Statistics. The first chart shows as of July 2019, the unemployment rate was 3.7%. The second chart shows as of July 2019, the Labor Force Participation rate was 63%.
That indicates that even though the unemployment rate was low, only 63% of the adult working population were participating in the labor market. That means 37% were not participating in the labor market.
Additional Labor Statistics Charts
If you are interested, here are additional Labor Statistics Charts from the BLS.
Which rate do you think gives you a better picture of the labor market?
© 2019 Mike Russo