The Importance and Misuse of the Labor Force Participation Rate

I’m tired of people misusing the labor force participation rate. On one hand, it’s an important concept that people need to take into account. On the other hand, people too often treat it like a simple statistic that tells us how well the economy is doing in this moment. The labor force participation rate by itself does not tell us how well the economy is doing in this moment; nor does it tell us if a leader is doing a good or bad job.

The unemployment rate is very cyclical, meaning it tends to be largely determined by how well the economy is doing right now. Compared to the unemployment rate, the labor force participation rate is more affected by long term factors that say little about how the economy is currently doing, although it is also affected by short term variables.

The unemployment rate is the number of people actively looking for work divided by the sum of the number of gainfully employed people plus those actively looking for work. This summation, the gainfully employed plus those looking for work, is the labor force. The unemployment rate only looks at people in the labor force. It does not look at people who are both not working and not looking for work.

This is why the labor force participation rate can be important when following the current state of the economy. Some people may want a job, but because of flaws in the current economy, have given up and have left the labor force. These people are not in the unemployment rate calculation…