Q&A of the Day – Low Labor Force Participation’s Impact on the Unemployment Rate
Each day I feature a listener question sent by one of these methods.
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Today’s Entry: Hey Brian, Thank you again for all of your hard work! This am you mentioned labor participation 44% can you help us understand what governmental programs are keeping these people from working? I thought all of the unemployment (paying those to stay home) mess was in the past
Frustrating
Bottom Line: It’s a great question. One quick note before I get started. I checked my notes and commentary from yesterday’s Top 3 Takeaways, I didn’t mention a specific percentage with the Labor Force participation rate, just that the reason the unemployment rate was at a 53-year low was specifically due to the Labor Force Participation Rate being at a 45-year low (it's that figure which probably created the confusion). So, about this...
One of the most oversimplified ways the labor market is commonly reported is by only reporting on the unemployment rate. The unemployment rate, especially in recent years, isn’t all that it appears to be. Commonly, people take the unemployment rate at face value, comparing where we are today compared to where we’ve been. The problem with that type of analysis...it’s incomplete because it’s not an apples-to-apples comparison.
Here’s what the unemployment rate actually measures...
- The number of unemployed people as a percentage of the labor force (the labor force is the sum of the employed and unemployed). The unemployment rate is calculated as: (Unemployed ÷ Labor Force) x 100.
Right, so it’s impossible to know what the unemployment rate represents, without knowing the labor force participation rate. Otherwise, theoretically, you could have everyone in the workforce decide to drop out and the unemployment rate would be zero...but that certainly wouldn’t be a good thing. So, let’s take a closer look at what’s really happening here.
The most recently reported unemployment rate is 3.4% nationally – which by way of rate alone, as mentioned, is a 53-year low. Now let’s bake the Labor Force Participation Rate into the mix.
Here’s what the labor force participation rate is:
- The proportion of the population ages 16 and older that is economically active: all people who supply labor for the production of goods and services during a specified period
Right, so if fewer people decide to work – it drops. And if they’re not in the labor force – they're not counted as part of the unemployment rate. This is the rest of the story of what’s been going on. The labor force participation rate isn’t close to being back to where it was. The labor force participation rate had hit a seven year high in February of 2020 – heading into the impact of the pandemic. The rate was 63.4%. So where are we today? 62.4%. Every percentage point in labor participation equals 2.637 million people. Given that we’re exactly one point lower in labor participation than prior to the pandemic currently, you’re able to see exactly how many fewer people are really working and why the current unemployment rate is a mirage.
The current unemployment rate factors in only 5.7 million people as being unemployed. With the real comparable rate to pre-pandemic levels being 8.337 million unemployed. That means the unemployment rate is being artificially underreported by 46% - making the real unemployment rate – 5%. Incidentally, that doesn’t even factor in those who are underemployed (part-time but want to work full-time), working odd jobs but lacking regular employment or those marginally attached to the workforce. The total across those three categories accounts for another 5.8 million people. If they were factored in, the unemployment rate would be 8.5%.
As for the government programs many have opted for, who’ve dropped out of the workforce. They run the gambit. Some on the older end retired early – taking Social Security earlier than they otherwise would have. Others have just taken advantage of the plethora of state expanded programs that have cropped up. While you had direct federal payments which went out multiple times, to most Americans, most of the expanded programs have occurred at the state level – largely in blue states. They’re far too expansive to mention. However, the best way I found to illustrate the point is this. Government assistance programs available to those who aren’t working have expanded by 93% since 2008’s Great Recession. That’s right, 93%.
When the facts are presented, it paints a considerably different picture doesn’t it? Hence what I had to say in my takeaways yesterday... That’s why, despite the unemployment rate sounding as low as it has in your lifetime, it doesn’t feel as good as it's been when it’s been higher. Because in reality, it's not. As always, there are two sides to stories and one side to facts.