- Unemployment has consistently fallen since December 2021
- One factor behind declining unemployment could be a slow recovery in the labor force participation rate since the onset of COVID
- Labor force participation has been on a downward trend for decades due to an aging population and other factors
Unemployment is one of the most important measures that economists track to gauge the health of an economy. In general, low unemployment rates mean an economy is strong because most workers can find jobs.
In the U.S., unemployment has remained relatively low over the past year despite concerns about an oncoming recession. However, low unemployment could be partially due to a low labor participation rate. This could be a bad sign for the economy moving forward (but Q.ai can help).
How is unemployment measured?
One thing that many people may not be aware of is that the Bureau of Labor Statistics uses multiple measures of unemployment. There are a total of six different unemployment rates that it keeps track of:
- U-1: People who are unemployed for 15 weeks or more
- U-2: Those who lost jobs and people who finished temporary jobs
- U-3: Total number of people unemployed (official unemployment rate)
- U-4: Total number of unemployed and discouraged workers
- U-5: Total unemployed, including discouraged workers and all other persons marginally involved in the labor force
- U-6: Total unemployed, plus everyone marginally attached to the labor force, plus the total employed part-time for economic reasons
The U-3 unemployment rate is the one you hear reported on the news, but it does not provide a complete picture of employment in the U.S. This is because it fails to include people who are not fully part of the labor force or want full-time work but can only find part-time jobs.
It also doesn’t include people who are not looking for work, whether or not they would like a job. Since the official unemployment rate fails to consider people who aren’t looking for a job, it is directly impacted by the labor participation rate.
For example, in an economy with 100 people that has only one person employed, the unemployment rate could be 0%, assuming none of the other 99 are looking for work.
What is the labor participation rate?
The Bureau of Labor Statistics tracks the labor participation rate as the percentage of the civilian noninstitutional population actively working or looking for work. It only considers those aged 16 or older as part of the labor pool.
100% labor force participation is unrealistic. Most 16-year-olds remain in school, and many continue to college. Plus, this measure includes older Americans who have passed retirement age.
However, tracking the labor participation rate can provide valuable insight to economists. For example, declining labor participation could indicate fewer people of working age who are looking for employment. It could also signify an aging population with more workers retiring.
What’s happening now?
Recently, the unemployment rate has remained low despite rounds of layoffs at tech companies and growing fears of an oncoming recession.
Since December 2021, the official unemployment rate has dropped from 3.9% to 3.5%. Other measures of unemployment have also dropped, with the U-6 rate falling from 7.3% to 6.5%.
However, since the start of the pandemic, the labor force participation rate has remained below historical levels.
The 1950s saw labor force participation rates of about 59% or 60%. That rose steadily through the 1990s, when it peaked at about 67%. This increase can be attributed to changes such as more women entering the workforce and a younger population.
Starting in the 1990s, labor force participation began to fall. With the onset of the pandemic, it fell from 63.3% in February 2020 to 60.1% in April 2020. That is a decrease of more than 8 million people.
Though it has recovered somewhat, labor force participation remains below 62.5%, well off pre-pandemic highs. Some believe that low unemployment rates are partly due to the reduced size of the labor force and aren’t indicative of a strong economy.
Why is the labor force participation rate low?
There are a few explanations for the low labor force participation rate.
Some explanations from the U.S. Bureau of Labor Statistics (BLS) include the following:
- Increased dependent care needs
- Fear of getting COVID
- Higher unemployment benefits
- Desire for higher wages reducing interest in low-paying jobs
- Higher pace of retirements due to an aging population
- Slower population growth
All these factors and more have combined to reduce the number of people in the labor force.
What it means for investors
Some people in the Census department argue that the primary driver behind the falling labor participation rate is demographics. The population is simply getting older and aging out of the workforce.
This trend was apparent during the 2010s, a decade with a strong economy that saw labor force participation fall from 64.4% to 63.6% as the percentage of the population 65 or older rose from 13.1% to 16.5%.
For investors, there are a couple of implications.
One is that labor participation serves as a way to track a population’s age. Aging populations have different needs than young ones, which could present business and investing opportunities.
Another is that businesses may have to pay higher wages as they compete for workers in a tight labor market.
If you’re struggling to decide how to invest in an era of an aging population and strong employment despite a potential recession, consider working with Q.ai. Its artificial intelligence can design a portfolio that succeeds in any economy and works toward any financial goal.
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The bottom line
One reason unemployment has remained low is the low labor force participation rate. There are many reasons people tend to leave the workforce, but one major driver is the aging American population.
While an older population could present business opportunities, it may also lead to a tighter labor market that drives up costs for businesses. Investors would be wise to monitor the situation and evaluate their investments to ensure they can thrive despite changes in the labor participation rate.
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