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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.