Pragmatic Capitalism

Practical Views on Money, Finance & Life

Unemployment Rate vs. Labor Force Participation Rate

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Hi Cullen-long time reader, first time commenter,

Yesterday listening to Janet Yellen testify before Congress, there were a couple of Congressmen (Republicans) who were grilling JY over the progress the economy has made since her time in office. She often cited how the unemployment rate is at a very low 4.8% as key factor in the strength in the economy and as a factor that Americans are generally doing better than they were 8 years ago. The Republican congressman would argue back that the overall economy isn’t that great, based on the fact that the Labor Force Participation Rate (LFPR) is at a very low 62.9% – implying that people actually aren’t looking for jobs anymore, things are not that great, and that the low unemployment rate is misleading. When she would argue that this is because of the aging baby boomer population, they would respond with a stat that percent of people working over the age of 65 is at an all-time high, while people ages 25-64 working was decreasing. I believe this was measure in terms of the overall labor force. This does in fact appear to be correct as well.

Wanted to hear your take on these two statistics and how it correlates with the actual number of Americans working. What would you view as a more accurate figure or “better stat”, to indicate the overall strength of the economy?

It seems as though the majority of economists go off of the unemployment rate, and that the LFPR is just a stat Republicans now use to show that Obama didn’t actually help the economy all that much. That being said it seems as though the LFPR isn’t a terrible indicator either when you look into it and see that isn’t jiving with the unemployment rate and that there are a lot of older people still working, although this may be more of an indicator that they just can’t afford to retire.

I’ll hang up and listen…

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Posted by jamesmatthias1
Posted on 02/16/2017 9:07 PM
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Hi James,

There’s a bit of truth in both views. It’s been shown that the LFPR is falling mainly due to cyclical factors. Bill McBride has done some nice work on this:

Then again, there’s also some truth to the idea that the US economy is operating well below capacity and we should see much healthier aggregate trends. Ironically, I suspect that this is mostly due to the lack of govt stimulus provided over the last 8 years and the decline in the federal workforce. The Republicans have been wrong about this economic recovery almost from day one. They thought QE would cause high inflation, then they said the stimulus woudn’t work, then they said govt spending would cause higher rates, then they said austerity would be better, etc, etc. Then, as soon as Trump wins a bigger deficit via tax cuts seems like a great idea. I mean, is this empirically based thinking or it is all just politics at work???

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Cullen Roche Posted by Cullen Roche
Answered on 02/17/2017 3:31 PM
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    The relationship among parameters LFPR, UR(Unemployment Rate), POP(Total US Population) and PAYEMS(Payroll Employment) can be shown in this accounting identity:

    LFPR * (1 – UR) = PAYEMS / POP

    Uptrend ratio (PAYEMS/POP) is more important than individual LFPR and PR. Uptrend shows improving employment quantity in labor market. Uptrend also means that UR decreases faster than decreasing LFPR.

    US has a deteriorated employment quality issue in labor market. For each employment, we generate less production income (GDI) relative to the paid compensation(GDICOMP) on average. The ratio of GDI / GDICOMP is in a down trend. Downtrend also means that labor productivity decreases faster than wage growth

    Employment Quantity and Quality Lines(in Blue and Red colors) in Labor Market

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    Posted by pliu412
    Answered on 02/20/2017 6:10 PM
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