Unemployment

Unemployment and Labor Force Participation Rate Over Time

Unemployment and Labor Force Participation Rate over Time

While the unemployment rate tends to vary cyclically, the labor force participation rate tends to follow longer-term trends.
Unemployment shrinks in a boom (a time of economic growth) and grows in a recession (a time of economic decline). Therefore, long-term unemployment rate shows cyclical variations. For example, in the United States the unemployment rate has reached a trough of around 3–4% during periods of economic expansion and peaked at approximately 8–10% during economic downturns.
The unemployment rate shows a pattern of ups and downs that corresponds to the business cycle of recessions and expansions. When businesses are doing well (during economic expansion) they hire more workers to increase revenue. When businesses are doing poorly (during economic recessions, indicated as gray bars) they lay off workers to cut costs.
The labor force participation rate also shows some cyclical variation, but this is greatly overwhelmed by a longer-term trend. For example, in the United States the labor force participation rate hovered just below 60% from the 1950s through the second half of the 1960s, then grew steadily to around 70% in the 1990s. It began a steady decline after the year 2000 to reach 63% in 2017.
The labor force participation rate (number of persons willing and able to work) varies less than the unemployment rate, showing longer-term trends. The recent decline in the labor force participation rate is likely a combination of an increase in the number of people reaching retirement, an increase in the number of young people attending college, and an increase in the number of discouraged workers following the recession. Recessions are indicated by gray bars.
The rise in the labor force participation rate from 1948 to 2000 resulted from the interplay between two contradictory forces: a steady decline in the male labor force participation rate, from 87% to 75%, and a much stronger increase in the female labor force participation rate, from 32% to 60%. This has occurred because of societal changes, that is, increased educational opportunities and rights for women, and an increased number of male homemakers. The rate of male labor force participation also declined because fewer men completed their education, such as graduating high school, and because education was required to get even a lower-wage job. The steady increase in the number of women in the labor force ended in 2000, while the fall in the number of men continued, resulting in a steady decline in the total rate. The decline in the total labor force participation rate was exacerbated after 2007 by the economic crisis. During the recovery from 2010 onward, the unemployment rate fell from 10% to below 5%, but the labor force participation rate continued to fall to around 63%, well below the peak in 2000.

Population aging partly explains the decline in labor force participation (although this is less severe in the United States than in other developed countries). The Baby Boomer generation, born from 1946 through 1964, began reaching retirement age in 2011, reducing the size of the older segment of the labor force. The aging of the population also increased the number of people who left the labor force to do unpaid work: taking care of their elderly relatives. Another factor is the increase in the number of people entering higher education, reducing the number of those ages 16–23 who are available for employment.

Policymakers are more concerned that the fall in the labor force participation rate is the result of discouragement, due to long-term unemployment, and social policies that undermine the incentive to work. Policymakers are also concerned with underemployment, which occurs when workers do not utilize their skills and/or earn well below their market value. This could happen when too many laborers with similar skill sets are in the job market or not enough jobs are available for them. Often these workers are forced to take lower paying jobs or jobs in different fields. Some of the long-term unemployment that contributes to discouragement may be structural, especially the movement of low-skilled manual jobs offshore. Technological unemployment, the replacement of low-skilled jobs by machines, also contributes to long-term unemployment and discouragement. Although the lower unemployment rate in the United States and other developed economies since 2010 is a welcome development, governments need to focus on less welcome trends in labor force participation and in involuntary part-time work, which is taking the place of regular full-time employment in more and more sectors of the economy. The so-called gig economy (freelance and short-term labor situations, often utilizing independent contractors) is offering limited work opportunities that lack the job security and benefits (such as paid leave, sick pay, pension contributions, and health insurance) of a regular job.

The unemployment rate data show ups-and-downs in the short run. These ups-and-downs match closely the ups-and-downs in the overall economy. To understand what these patterns mean, economists look at both changes in gross domestic product (GDP), a measurement of output produced by an economy, and changes in the unemployment rate over time.

In comparing the unemployment rate with the growth rate of GDP, the unemployment rate and the GDP growth rate move in opposite directions to each other. In an economic expansion, the unemployment rate falls when GDP is growing. During a recession, the unemployment rate rises. However, there is always some unemployment in the economy because of frictional and structural unemployment. This unemployment rate inherent in all markets, even healthy ones, is called the natural rate of unemployment: the amount of unemployment that occurs when the economy is producing at potential output. The natural rate of unemployment shows that there cannot be zero unemployment: individuals are always beginning or ending jobs, seeking new and improved jobs, and finishing their education and entering the job market, for instance. The natural rate of unemployment can change over time. The Federal Reserve Board estimates that the current natural rate of unemployment is between 4.5–6%.
The natural rate of unemployment indicates that there will always be some people who are unemployed: people changing jobs, people entering the workforce for the first time, and so on. The natural rate of unemployment in the United States peaked in the 1970s, and is projected through 2025, with periods of recession indicated by gray bars.