Loading the player...

What is 'Participation Rate'

The labor force participation rate measures an economy's active labor force and is the sum of all employed workers divided by the working age population. It refers to the number of people who are either employed or are actively looking for work. During an economic recession, many workers often get discouraged and stop looking for employment, resulting in a decrease in the participation rate. The number of people who are no longer actively searching for work would not be included in the participation rate.

BREAKING DOWN 'Participation Rate'

The participation rate is an important metric to use when analyzing unemployment data because it reflects the number of people who are interested in participating in the workforce. These people are either looking for employment or are employed, and are at or above the working age of 16. People not included in the participation rate include those who do not want to work or can't work. This includes students, homemakers, incarcerated people and retirees.

Significance of the Participation Rate

It is necessary to analyze the participation rate in conjunction with the unemployment rate because people classified as unemployed according to the unemployment rate might not be active participants of the workforce. When looking at the unemployment rate alone, the interpretation can be made that a higher number of people are not earning income, and are therefore not active contributors to the economy. However, these people may not be working due to choice and therefore could still be active contributors to the economy. They could be either retirees spending their savings, or students increasing their skills and their future income potential. The participation rate and unemployment data should be observed in tandem to better understand an economy's overall employment status.

Another significant use of the participation rate comes into play during a recession. When the economy is really bad, workers may get discouraged after trying to secure employment for a long time, and they may decide to drop out of the workforce. This would make the participation rate fall, as these people are then classified as not actively seeking employment. During a recession, a sudden drop in the participation rate is critically assessed.

Structural Changes to Participation Rate

From 2006 to 2016, the U.S. civilian labor force participation rate has hovered in the 62 to 67 range, with a fairly consistent decrease in the participation rate since 2009. The decline in the participation rate has been attributed to structural changes and not the overall health of the economy. This structural change in the number of people actively seeking work has occurred due to retiring baby boomers, a decline in working women, and more people deciding to attend college.

RELATED TERMS
  1. Underemployment

    Underemployment is a measure of employment and labor utilization ...
  2. Authorized Participant

    Authorized participants are one of the major parties at the center ...
  3. U-6 Rate

    The U-6 rate is the unemployment rate that includes discouraged ...
  4. Structural Unemployment

    Structural unemployment is a longer-lasting form of unemployment ...
  5. Employment Situation Report

    The Employment Situation report is a monthly report compiling ...
  6. Disguised Unemployment

    Disguised unemployment is unemployment with low productivity ...
Related Articles
  1. Financial Advisor

    How Labor Force Participation Rate Affects U.S. Unemployment

    While a falling unemployment rate sounds like a good thing, it can actually be indicative of people leaving the labor force because they can't find a job.
  2. Insights

    How Demographics Drive The Economy

    Demographics can have a profound effect on the economy. An aging population coupled with a declining birthrate points to a decline in economic growth.
  3. Personal Finance

    America’s Labor Market: Hidden Distortions and Uncertain Forecasts

    Employment reports released by the Bureau of Labor Statistics have a profound impact on political, business, consumer, and investor behavior.
  4. Insights

    What is jobless growth?

    What are the effects that a jobless growth economy has on workers and investors alike. Learn about these effects here.
  5. Insights

    Jobs Beat Forecasts, But "Real" Unemployment Rises

    The "real" unemployment rate, which accounts for discouraged and temporary workers, rose to 9.7% in July from 9.6% the month earlier
  6. Insights

    The Cost of Unemployment to the Economy

    Unemployment carries many costs, both obvious and hidden, for an economy.
  7. Retirement

    5 Reasons Why More Retirees Are Going Back to Work

    The list of encore careers for seniors is growing longer.
  8. Investing

    How inflation and unemployment are related

    How can inflation affect unemployment, and vice versa? Here, we examine the relationship between wage inflation, consumer prices, and unemployment.
RELATED FAQS
  1. What is the difference between frictional unemployment and structural unemployment?

    Learn about structural unemployment and frictional unemployment, the differences between the two and their main characteristics. Read Answer >>
  2. What is the difference between structural unemployment and cyclical unemployment?

    Learn more about about the differences between structural and cyclical unemployment and when cyclical unemployment becomes ... Read Answer >>
  3. How did the Great Recession affect structural unemployment?

    Structural unemployment is difficult to measure, but there are hints in the data that the spike in unemployment following ... Read Answer >>
  4. What's the difference between cyclical unemployment and seasonal unemployment?

    Learn about the key differences between cyclical and seasonal unemployment. Read about distinguishing features of each of ... Read Answer >>
Trading Center