The unemployment rate is low, but so is the labor force participation rate – What’s happening in the US labor market?

Key points to remember

  • Unemployment has been falling steadily since December 2021
  • One of the factors behind the drop in unemployment could be a slow recovery in the labor force participation rate since the start of COVID
  • Labor force participation has been declining for decades due to population aging and other factors

Unemployment is one of the most important measures that economists follow to assess the health of an economy. In general, low unemployment rates mean that an economy is strong because most workers can find jobs.

In the United States, unemployment has remained relatively low over the past year despite fears of an impending recession. However, the low unemployment rate could be partly due to a low participation rate. This could be a bad sign for the evolution of the economy (but Q.ai can help).

How is unemployment measured?

One thing that many people may not know is that the Bureau of Labor Statistics uses several measures of unemployment. There are a total of six different unemployment rates that it tracks:

  • U-1: Persons unemployed for 15 weeks or more
  • U-2: Those who lost their jobs and those who ended temporary jobs
  • U-3: Total number of unemployed (official unemployment rate)
  • U-4: Total number of unemployed and discouraged workers
  • U-5: Total unemployed, including discouraged workers and all others marginally involved in the labor force
  • U-6: total number of unemployed, plus all those marginally connected to the labor force, plus the total number of part-time employees for economic reasons

The U-3 unemployment rate is what you hear about on the news, but it doesn’t provide a complete picture of employment in the United States. Indeed, it does not include people who are not fully part of the labor force or who want part-time work but can only find part-time jobs.

It also does not include people who are not looking for a job, whether or not they want a job. Since the official unemployment rate does not take into account people who are not looking for work, it is directly impacted by the activity rate.

For example, in an economy of 100 people that has only one person employed, the unemployment rate might be 0%, assuming that none of the other 99 are looking for work.

What is the activity rate?

The Bureau of Labor Statistics tracks the labor force participation rate as a percentage of the noninstitutional civilian population actively working or seeking employment. It only considers people aged 16 or older to be part of the labor pool.

100% participation in the labor market is unrealistic. Most 16-year-olds stay in school, and many go on to college. Additionally, this measure includes older Americans who are past retirement age.

However, monitoring labor force participation can provide valuable information to economists. For example, a decline in labor force participation could indicate that fewer people of working age are looking for work. It could also mean an aging population with more workers retiring.

What happens now?

Recently, the unemployment rate has remained low despite rounds of layoffs at tech companies and growing fears of an impending recession.

Since December 2021, the official unemployment rate has fallen from 3.9% to 3.5%. Other measures of unemployment also fell, with the U-6 rate dropping from 7.3% to 6.5%.

However, since the start of the pandemic, the activity rate has remained below historical levels.

The 1950s saw labor force participation rates of around 59% or 60%. This figure increased steadily during the 1990s, when it peaked at around 67%. This increase can be attributed to changes such as more women entering the workforce and a younger population.

From the 1990s, labor market participation began to decline. With the start of the pandemic, it fell from 63.3% in February 2020 to 60.1% in April 2020. This represents a decrease of more than 8 million people.

Although it has recovered somewhat, labor force participation remains below 62.5%, well below pre-pandemic highs. Some believe that low unemployment rates are partly due to the small size of the labor force and are not a sign of a strong economy.

Why is the activity rate low?

There are a few explanations for the low activity rate.

Here are some explanations from the US Bureau of Labor Statistics (BLS):

  • Increased Dependent Care Needs
  • Fear of contracting COVID
  • Higher unemployment benefits
  • Desire for higher wages reducing interest in low-paying jobs
  • Acceleration of the rate of retirements due to the aging of the population
  • Slower population growth

All of these factors and more have combined to reduce the number of people in the labor force.

What this means for investors

Some people in the census department say that the main driver of the decline in the labor force participation rate is demographics. The population is simply aging and moving away from the labor force.

This trend was evident during the 2010s, a decade characterized by a strong economy that saw the participation rate increase from 64.4% to 63.6% while the percentage of the population aged 65 or over plus went from 13.1% to 16.5%.

For investors, there are a few implications.

The first is that labor force participation serves as a means of tracking the age of a population. Aging populations have different needs than younger people, which could present business and investment opportunities.

Another is that companies may have to pay higher wages as they compete to recruit workers in a tight labor market.

If you’re struggling to decide how to invest in an era of an aging population and strong jobs despite a potential recession, consider working with Q.ai. Its artificial intelligence can design a portfolio that succeeds in any economy and works towards any financial goal.

Q.ai also offers portfolio protection to protect your investments during times of economic uncertainty.

The bottom line

One of the reasons why unemployment has remained low is the low labor force participation rate. There are many reasons why people tend to leave the workforce, but one of the main factors is the aging of the American population.

While an older population can present business opportunities, it can also lead to a tight labor market that drives up costs for businesses. Investors would be wise to monitor the situation and evaluate their investments to ensure that they can thrive despite changes in the rate of activity.

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