Participation Rate vs. Unemployment Rate: What's the Difference?

Participation Rate vs. Unemployment Rate: An Overview

The participation rate and unemployment rate are economic metrics used to gauge the health of the U.S. job market. The key difference between the two is the participation rate measures the percentage of Americans who are in the labor force, while the unemployment rate measures the percentage within the labor force that is currently without a job. Both are calculated by the Bureau of Labor Statistics (BLS).

Participation Rate

Citizens are classified as members of the labor force if they have a job or are actively looking for one. The participation rate is the percentage of adult Americans—excluding active-duty military service people and those incarcerated or otherwise institutionalized—who are members of the labor force.

The 21st century has seen a steady decline in labor force participation. In 2000, it reached a peak of 67.3%. By July 2020, it had fallen to 62.7%. The COVID-19 pandemic had an initial impact on both unemployment and the participation rate. In fact, there was a marked decrease in the participation rate in 2020 in the U.S., from a level of 63.4% in January of 2020 to 60.2% in April of 2020—the biggest drop in a single year since 2001.

Factors That Impact Participation Rate

A number of factors impact the labor force participation rate, including social, demographic, and economic trends. Following a recession in 2001 and the 2008 financial crisis, for example, the participation rate saw significant dips.

Many economists point to the baby boomer generation retiring and leaving the labor force as partly responsible for a decrease in labor participation. Economists also argue that the decline is the result of low-skilled workers losing their jobs to outsourcing or automation, having no success finding new employment, and therefore dropping out of the labor force entirely. For this reason, they feel the participation rate is a more accurate measure of the state of the job market than the unemployment rate.

The unemployment rate does not consider discouraged workers, defined as those unemployed workers who would like to work but have given up looking for work altogether, usually because they believe that there are no jobs available.

However, there are a number of reasons why adult Americans might choose not to participate in the labor force. Students, stay-at-home parents, and the retired may choose to keep themselves out of the workforce, for example.

Unemployment Rate

The unemployment rate only considers those in the labor force. For the purposes of calculating the unemployment rate, part-time workers are considered to be employed, even if they are involuntary part-time workers or part-time workers who would rather be employed full-time, but cannot find full-time employment due to inability to find full-time employment or lack of demand for their skills.

An unemployment rate of 5% means only five out of 100 workers in the labor force are without jobs. However, the unemployment rate does not consider unemployed workers who have given up looking altogether, even though they want to work.

At the end of December 2020, the unemployment rate was 6.7%, according to the Bureau of Labor Statistics. The number of unemployed people remains unchanged from November 2020 at 10.7 million. The report noted that "although both measures are much lower than their April highs, they are nearly twice their pre-pandemic levels in February."

A Comprehensive Picture of the Job Market

Taken together, the participation rate and the unemployment rate can provide a more comprehensive picture of the job market. A high participation rate combined with a low unemployment rate is a sure sign of a robust job market. During the late 1990s, the participation rate was 65%, while the unemployment rate hovered below 5%. Most economists agree this was one of the best periods in modern history for American jobs.

However, the participation rate and the unemployment rate aren’t the only factors used to form a picture of the job market. The employment-population ratio measures the ratio of adults 16 years of age and older who are employed. The employment-population ratio is less prone to vagaries caused by seasonal workers or by those who experience temporary unemployment due to illness, temporary layoffs, leaves of absence, or other factors.