Labor Force Participation Rate ... Why It's Important and Why It's Worrisome as Well

Yesterday we heard a lot about the importance of the labor force participation rate.

Because of its impact on our nation's economic health and well being, we'll discuss the labor force participation rate more fully and what it all means today. We'll begin with a basic explanation of why tracking and understanding the changes in the U.S. labor participation rate from time to time are essential points of information for all Americans. And then we'll move the conversation forward to why it's at a disturbingly high level currently as well what this portends for future U.S. economic growth.

The nation's total output is a function of the totality of three factors: (1) the total number of people employed in relation to the total working age population; (2) the number of hours these employed people are working; and (3) how productive these people who are working are in each of those hours worked, or how much more output is generated per hour of work compared to a prior point in time.

Thus, it all starts with how many people are employed in relation to the total population, because unless there's employment, there are no hours worked and no productivity gains to be considered.

Workforce Dropout Number Is Worrisome for Labor Market explains the problem with the current U.S. labor force participation rate in simple language:

"Friday's disappointing employment report underscores just how tough it still is to find a job. But perhaps even more worrisome is how few people are even trying.

The share of the population that's either working or looking for work, a metric known as the participation rate, fell to 63.3% in March, its lowest level since 1979. Nearly half a million Americans dropped out of the labor force in March, the biggest one-month decline since December 2009.

The participation rate doesn't get as much attention as the better-known unemployment rate, but many economists consider it a better gauge of the labor market's long-term health. The jobless rate only counts people who are actively looking for work; it ignores the millions of Americans who have given up looking entirely.

Plenty of people are also leaving the labor force for more benign reasons. Six of every 10 workers who drop out each month had jobs the month before—in other words, they are retiring, going back to school or quitting work to raise children. The aging of the baby-boom generation means the participation rate would have fallen in recent years even if the last recession had never happened.

But demographics alone can't explain the downward trend. March's labor force decline was concentrated not among retirement-age baby boomers but among those under age 25, who accounted for nearly half of all drop-outs. The participation rate among those under 25 has fallen below 55%, from just under 60% when the recession began. That reflects to some degree the long-run increase in college attendance, but the big one-month drop also suggests young people are struggling to find work in the still-shaky economy.

Among those in the middle of their working lives, the downward trend is milder but still unmistakable. The participation rate for so-called prime-age workers—those between 25 and 54—was 81.1% in March, the lowest level since 1984. There is no benign explanation for that decline: The number of prime-age workers counted as "unemployed" has fallen by 731,000 in the past year, but just 166,000 of those workers found jobs; the rest simply gave up looking.

The shrinking labor force has long-term implications for the U.S. economy. Economic research has shown that the longer people stay out of work, the harder it is for them to find jobs—thus many of the recent drop-outs will likely never return to the labor market, even as millions of baby boomers are poised to retire. Barring a rapid economic acceleration that leads to a hiring surge, that will leave a smaller share of the population supporting the economy.

At the same time, many of those who do return to work will be forced to take jobs that pay far less than the ones they held before the recession, while many young people have missed out on early-stage career opportunities that are critical to earnings later in life. For them, the scars of the recession are likely to last long after hiring eventually rebounds."

Summing Up

We absolutely have a jobs crisis in America.

Unfortunately, the politicians are too busy playing games to come to grips with the need to (1) emphasize private sector growth by reforming the tax code to stimulate private sector investment, (2) facilitate the development, sale and efficient distribution of our nation's abundant domestic energy resources and (3) enact the necessary legislation to bring our long term entitlements spending under control.

If we did those three things, the economy would grow, deficits would shrink, our long term financial situation would improve, consumer demand would pick up and jobs would increase.

And all along the way, the U.S. labor force particpation rate would increase, thereby causing a substantial increase in our nation's employment and rate of economic growth.

It's really all that simple, and it must be done at some time, so why not now? Politics, that's why.

That's my take.

Thanks. Bob.