The shrinking labor force and falling labor participation rate

With March’s labor report out tomorrow, a behind the scenes look at the labor force that is measured by the government’s household survey provides us with a different look at what’s happening among job seekers that we don’t traditionally see from a quick glance at nonfarm payrolls and the unemployment rate.

First, a couple of definitions are in order.  Nonfarm payrolls are calculated by the government and are released the first Friday of each month in what is called the Establishment Survey.

The unemployment rate accompanies the nonfarm payroll data but comes from a separate survey called the Household Survey.

As its name suggests, the establishment survey tallies workers and is taken from businesses and local and state governments.  The household survey, however, is a detailed questionnaire aimed at households and tells us who is working, not working and looking for employment, and not working and not looking for a job.



The chart above reveals what has happened over the last decade to the labor force – those who are working full time or part time and those who are actively searching for work but are not working – and employment – those working full or part time.

Note: Those who are retired, under 16, in prison or a nursing home, active duty, in school, or are home  because of family responsibilities are not counted in the above graph and are not in what the government calls the labor force.

The difference between the two lines gives us the number of unemployed.

As an example, the level of employment in February 2011 stood at 139,573, while the number of individuals in the labor force stood at 153,246.

The difference, 13,673, measured those who were unemployed. Divide that into 153,246 and you get the unemployment rate of 8.9%.

Simple enough? Absolutely!

What is not so simple to explain and what has puzzled economists is the steep decline in the labor participation rate, or the portion of the non-institutionalized population 16 or older that is part of the civilian labor force.

Labor Participation Rate

              (Source: BLS)

The worst recession in 70 years has clearly blunted the growth in the labor force, as some have been forced into early retirement, while others have stayed in school amid poor job prospects and still others have returned to school.

And still others, unable to find work after months of fruitless efforts, have temporarily given up the job search.  All of these factors have probably played a large role in muting the rise in the unemployment rate as well as reducing the unemployment rate to a still-high level of just under 9%.

Had the labor force continued its uninterrupted trend over the past decade, the jobless rate would now stand near 12%!

An improving economy should draw some of the discouraged workers back into the workforce, and those who have returned to school or stayed in school will eventually be drawn back into the labor force.

That should put the labor force on an upward track. Further, general population growth should also lend support.

However, recent forecasts by economists of faster labor force growth from discouraged workers returning to the job search have failed to materialize, and a lack of upward movement could present longer-term problems for the U.S. economy.