21.1 How the Unemployment Rate is Defined and Computed

What Is Employability?

Employability is the lifelong, continuous process of acquiring experience, new knowledge, purposeful learning, and skills that contribute to improving your marketability for enhancing your potential to obtain and maintain employment through various shifts in the labor market. It is based on a set of individual characteristics.

It is not equivalent to employment; rather, it is a prerequisite for gainful employment. Essentially, employability is your relative ability to find and stay employed, as well as make successful transitions from one job to the next, either within the same company or field or to a new one, at the discretion of an individual and as circumstances or economic conditions may dictate.

Employability will vary with economic conditions, although there are some exceptions in professions insulated from economic fluctuations, such as healthcare, education, and defense sectors. It applies to almost everyone who is part of the labor force, as the ability to obtain, maintain, and switch employment over time is imperative to anyone’s survival as well as success in life. You must have a set of skills that are usable in the labor market.

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The long-run decline in the labor force participation rate

The Bureau of Labor Statistics has been keeping track of the labor force participation rate since January 1948, when the rate was just 58.6 percent. Labor force participation stayed at about this level until 1965 when it began a climb that would last 35 years, until it peaked in April 2000 at 67.3 percent. What caused the steady increase in the rate? Looking at the difference in labor force participation by gender reveals the answer. (See Figure 3.)

Figure 3

The labor force participation rate for men has bee

The labor force participation rate for men has been on a downward trajectory for nearly 60 years, almost from the moment the agency started keeping track of the statistic. In January 1948, male labor force participation was 86.7 percent. By April 2000, when overall labor force participation peaked, male labor force participation had fallen to 74.9 percent. For women, the trend has operated in precisely the opposite direction. In April 1948, the participation rate for women was 32 percent. Female labor force participation steadily increased for the next half century, peaking at 60.3 percent in April 2000. Over the second half of the 20th century, women moved into the labor force—and were increasingly likely to stay there, even after becoming mothers. This sea change in women’s labor force participation is what helped buoy the overall labor force participation rate, even as men were increasingly less likely to be in the labor force.

Since 2000, however, the growth in women’s labor force participation has stalled out. Men’s labor force participation has continued to decline. So the question remains: what is responsible for the decline beginning in 2000?

The clearest cause of the decline in the overall labor force participation rate is the aging of the population. The Baby Boom generation, born between 1946 and 1964, is a large cohort of workers whose retirement age coincides with decline in labor force participation that began in 2000. As these workers retired, they left the labor force and in turn pushed down the total labor force participation rate.

At the same time, the participation rate for younger workers  (age 16 to 24 years) has been on the decline for decades as well. The downward trend in labor force participation for younger Americans is explained by increased schooling: younger workers are more likely to stay in school longer, as college attendance has become substantially more common. So, a positive development—increased educational attainment—pushed down the labor force participation rate.

Yet the demographic shifts described above cannot explain the entire decline in the labor force participation rate. Prime-age workers’ labor force participation has also been on the decline. The rate of participation for workers ages 25 to 54 declined from 84.4 percent in April 2000 to 83.1 percent in December 2007, on the eve of the Great Recession.

Women’s labor force participation was driving the overall upward trend in labor force participation through 2000, so the plateau and then decline in women’s participation in the ensuring years is an important factor for explaining the national trend. Understanding why women’s labor force participation has stalled is key to reversing the downward trends in the national rate. In 1990, the United States had the sixth-highest female labor force participation rate amongst 22 high-income OECD countries. By 2010, its rank had fallen to 17th. Why have other high-income countries continued their climb while the United States has stalled? Research by economists Francine Blau and Lawrence Kahn suggests that the absence of family-friendly policies such as paid parental leave in the United States is responsible for nearly a third of the U.S. decline relative to other OECD economies. As other developed countries have enacted and expanded family-friendly policies, the United States remains the lone developed nation with no paid parental leave.

Trends

The labor force participation rate is the number of people who are available to work as a percentage of the total population. The rate increased between 1960 and 2000 as women entered the labor force. In January 2000, it reached a peak of 67.3 percent. The 2001 recession lowered it to 65.9 percent by April 2004. The 2008 financial crisis lowered it more to 62.3 percent by October 2015. By November 2018, it had only risen to 62.9 percent.

That drop should mean that the supply of workers is falling. Fewer workers should be able to negotiate for higher wages, but that didn’t happen. Instead, income inequality increased as average income levels suffered. Workers couldn’t compete when jobs were being outsourced. They also couldn’t compete with robots. Businesses found it more cost-effective to replace capital equipment instead of hiring more workers. 

Productivity is the amount of goods and services that the labor force creates.  It's measured by how much is produced by a certain amount of labor and a fixed amount of capital. The more they create, the higher their productivity. Companies seek ways to boost productivity because it increases their profit. High productivity creates a competitive advantage. That's true for the individual worker, a company, or a country.

How do you calculate the labor force participation rate?

The labor force participation rate is the portion of the population that is working or looking for work. It is calculated by dividing the total labor force (employed plus unemployed) by the total civilian non-institutionalized population. You would then multiply the result by 100 to express it as a percentage.

Further publications related to Employment

OECD Labour Force Statistics Publication (2022)

Better Skills, Better Jobs, Better Lives Publication (2012)

Entrepreneurship at a Glance Publication (2017)

The Effect of the LFP Rate on the Economy

A decline in the number of people participating in the labor force can have a negative impact on the overall economy.

According to research published by the Federal Reserve Bank of Philadelphia in 2017, a falling LFP rate can slow the growth of GDP, since fewer people are contributing to the nation’s output of goods and services. Additionally, a lower participation rate can lead to higher tax rates, since the government has a narrower tax base from which to draw revenue, the authors noted.

The labor force participation rate is one of many important statistics to look at when examining the overall health of the labor market. Understanding the factors affecting the rate can also help in understanding the potential impact of LFP trends on the economy as a whole.

The Labor Force Participation Rate vs. the Unemployment Rate

The BLS also explains the difference between the labor force participation rate and the unemployment rate. The LFP rate measures the number of people who are either working or actively seeking work as a share of the working age population. The working age population consists of people 16 years old and over. More broadly, the LFP rate can be defined as the percentage of the population that is in the labor force.

While the LFP rate takes into account the entire working age population, the national unemployment rate focuses only on the people in the workforce. It reflects the number of unemployed people as a percentage of the labor force.

In other words, as a June 1 Investopedia article sums it up:

  • The LFP rate refers to the percentage of people age 16 and older who are in the labor force.
  • The unemployment rate refers to the percentage of people in the labor force who don’t have jobs but are actively seeking work.

Policy implications moving forward

What are the implications for future policy? If policy makers want to raise the labor force participation rate, or at least keep it as high as possible, a variety of options belong on the table.

Fiscal and monetary policy that focuses on strengthening economic growth and prioritizing full employment can help boost the labor force participation rate. A new study from economist Jesse Rothstein finds lackluster employment growth across nearly all industries between 2009 and 2014, reflecting a continued shortage of demand for all workers. Stronger economic growth can help pull more workers into the labor force if they see higher wages being offered by employers. Doing so requires more stimulus through fiscal policy, such as increased infrastructure investment. According to the International Monetary Fund, boosting infrastructure spending can accelerate economic growth by 1.5 percent in the short-term. This increased growth would help create jobs and pull discouraged workers back into the labor force, as well as improving the health of the economy in the longer-term. More accommodative monetary policy also has immense potential to stimulate labor demand. Fiscal and monetary policies are immensely important, but smart microeconomic policies could help as well.

First, the absence of family-friendly policies in the United States is a key reason for the decline in the overall labor force participation rate and the stalling out of women’s labor force participation. The Mad Men Era is over, to the great relief of many women. But public policy has not kept up with the needs of working families, and balancing the competing demands of work and home remains a fundamental challenge for millions of households. Recent research suggests that the failure to adapt our policies to meet the demands of the modern American family means that women’s labor force participation has stagnated. Paid family leave, flexible scheduling, affordable high-quality childcare, and universal pre-kindergarten are all policies that could play a major role in jump-starting the engine of women’s labor force participation. By providing policies that recognize individuals’ dual roles as both workers and caregivers, we have the opportunity to attract and retain talent in the labor force.

The potential impact of paid family leave on the labor force participation rate is worth discussing in a bit more detail because of the demographic trends discussed earlier. Research suggests that paid parental leave can substantially improve mothers’ labor force participation, because it encourages them to return to their job following a period of bonding with a new baby. But caregiving extends beyond children, as anyone who has provided care for an aging relative well knows. The share of prime-age workers with eldercare responsibilities is increasing as the Baby Boom cohort ages. Unpaid family caregiving is the most common form of eldercare for people of advanced age. Nearly half of all individuals who provide eldercare are part of the “Sandwich Generation,” simultaneously responsible for both aging parents and young children. Paid family leave that allows workers to take temporary time off to care for a loved one—whether that loved one is a new child or an aging parent—is a potentially powerful tool for bolstering labor force participation.

A second proactive policy option to improve labor force participation is a criminal justice reform agenda that includes a reduction in the incarceration rate and policies to reduce discriminatory employment practices against those with criminal records. The U.S. incarceration rate is currently the highest in the world, a consequence of three decades of dramatic growth in the prison population. While the crime rate has fallen over the same period that the prison population has grown exponentially, research shows that the efficacy of increased incarceration as a crime control technique is virtually non-existent; crime rates rise and fall independent of incarceration rates since the 1990s. Coupled with the rise in incarceration, nearly one in three adults in 2010 had a serious misdemeanor or felony arrest that can show up on a routine background check for employment, and a substantial share of discouraged workers report a felony conviction. Nine in ten large corporations report that they conduct criminal background checks, and a wide range of research suggests that a criminal record (both felony and misdemeanor charges, regardless of age) plays a significant negative role in an individual’s employment prospects. New research by economist Michael Mueller-Smith shows that overly aggressive criminal justice policies can significantly reduce the labor force participation of individuals once they leave prison or jail.

Taken together, the impact of our nation’s current criminal justice policies suggest that reform could play a significant role in improving labor force participation. In the long run, reducing flows into the prison population could help boost the labor force participation rate. In the short-term, “ban the box” policies that remove the criminal history question from job applications and postpone the criminal background check until later in the hiring process could help pull some discouraged workers back into the labor force.

It is important to avoid being distracted by policies that have little to do with the trends in the labor force participation rate. Social Security Disability Insurance, or SSDI, for example, has been cited as a program that reduces the participation rate by discouraging work. Proponents of this hypothesis argue that more relaxed medical screening for disability and an increase in the program’s income-replacement rate have increased the disability rolls and pulled able-bodied workers out of the labor market. But studies suggest that the increase in the number of Americans receiving SSDI may be a simple matter of demographics. For instance, economist Monique Morrisey uses the demographic-adjusted disability incidence rate, which shows that after controlling for the aging of the population the rate for men has been on the decline for the last 20 years. At the same time, the age-adjusted rate for women has increased, but to a level similar to the age-adjusted rate for men. This analysis indicates that disability has not become more prevalent, but rather that the aging of the workforce has been the primary cause of the increase in SSDI receipt. Of course, policymakers may have other reasons for wanting to reform the disability insurance program, but we should not expect changes in SSDI to provide a major boost to the labor force participation rate.

Similarly, the Affordable Care Act has been cited as a program that could reduce the labor force participation rate and depress overall labor supply. To a certain extent, this is true. The Congressional Budget Office’s model predicts that workers will supply less labor once the five-year-old health care law is fully implemented in 2016. Note, however, that this reduction in labor supply is due to choices by the workers, not because of a reduction in employers’ demand for labor. Some of this decline in labor supply will come as a reduction in the hours worked by some workers, rather than a decline in the number of workers employed. In other words, the program may lead to an increase in voluntary part-time work. Data from the past several years shows just that trend: an increase in workers voluntarily working part-time. While the ACA may have impacts on labor supply, those effects generally reflect a positive outcome for workers.

The Bottom Line

Employability’s fluid nature makes it a very complicated and highly controversial concept that has various actors and components, some having a direct and others an indirect impact on your ability to find, obtain, and maintain gainful employment over time. It is affected by numerous factors, including level of training, education, individual IQ, culture, socioeconomic biases, and political affiliation.

As education seems to be the one component that can be used to greatly influence employability, can it be utilized to improve your employability if all or most of employability’s components are incorporated in the educational curriculum? If so, can this be measurable using both quantitative and qualitative methods to show the possible improvement by exposing students to those components and providing training for them?

It appears that people with a high degree of employability tend to possess the following traits: They have confidence in their ability to take effective and appropriate action, can explain their goals clearly, live and work effectively with others, and continue to learn from their experiences, both on an individual basis and in association with others in a diverse and ever-changing society.

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