Labor force participation rate: Completing the employment picture

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People at work.

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On the first Friday of every month, Wall Street zeroes in on the big “jobs report”—officially called the Employment Situation Summary. The main headlines? Unemployment rate, growth in nonfarm payrolls, and average hourly earnings. However, there’s a key statistic that often gets overlooked: the labor force participation rate (LFPR). (Some economists call it “civilian labor participation” because it typically excludes active duty members of the military.)

Unemployment data includes, not the entire population, but rather people who are considered part of the labor force. This includes those who are actively employed, those unemployed but actively seeking work, and those who are “underemployed”—working, but perhaps not as much as they would like. In general, the labor force does not include children, college students, retirees, or those “detached” from the labor force, such as prisoners, people in institutions, and anyone who is unemployed but has given up looking for a job (economists call them “discouraged” workers).

So, although the LFPR often flies under the radar, it doesn’t just complete the big picture. It can actually shift the meaning of the other headline numbers and, by extension, the entire report.

The labor force participation rate measures the percentage of the civilian working-age population who are employed or actively looking for work (see the detailed definition above). It’s published on the first Friday of each month by the U.S. Bureau of Labor Statistics (BLS).

Here’s how the labor force participation rate is calculated:

(Labor force / total working-age population) x 100

For example, if 3,000 people were working in a small town of 5,000 civilian working-age adults, the calculation would look like this: (3,000 / 5,000) x 100 = 60%.

If you’re checking the unemployment rate as a key economic bellwether, it helps to know how many people are actually working or looking for work. Here’s why.

Imagine two hypothetical scenarios in which the unemployment rate is 4% (which has historically been considered at or near full employment).

To get a clearer picture of an economy’s employment situation and productivity potential, it helps to factor in the labor force participation rate alongside unemployment data, jobs growth, and wage trends. For a society to function, it needs to produce enough to cover the basic needs of all its members—including those not in the labor force.

Figure 1 shows the labor force participation rate versus the unemployment rate from the end of World War II to 2024. The shaded areas represent recessionary periods.

Between 1950 and 1965, around 59% of working-age Americans were active in the workforce. Then workforce participation steadily surged, peaking in 2000 when over 67% of the civilian working age population was active. Over the next two decades, the rate declined. After the pandemic in 2020, the labor force participation rate settled at around 62% by 2024.

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Figure 1: UNEMPLOYMENT AND LABOR PARTICIPATION. Falling unemployment (red line) during the rise in participation (blue line) helped fuel what then–Fed chair Alan Greenspan called the “productivity miracle” of the late 20th century. The 21st century fall in participation helped exacerbate the effects of the last two recessions.

Source: U.S. Bureau of Labor Statistics, Labor Force Participation Rate [CIVPART]; Unemployment Rate [UNRATE], retrieved from FRED, Federal Reserve Bank of St. Louis, August 27, 2024.

LFPR surge: 1965–2000

Several things contributed to the rise in labor force participation:

LFPR decline: After 2000

Although many factors contributed to the decline of the LFPR after 2000, one of the biggest was the aging of the baby boomer generation. Their exit from the workforce caused a gradual yet significant decline.

Technology, automation, and globalization also played a role. Automation displaced many manufacturing workers and replaced them with machines and software. Workers who couldn’t adapt to the new tech-driven economy struggled to find employment. Globalization added to these pressures, as companies began moving both skilled and unskilled jobs overseas to cut costs.

Some economists argue that the so-called “wealth effect,” brought about by a long period of growth in the stock and real estate markets, also contributed to the shrinking labor force by providing millions of early retirees sufficient assets to cover a longer retirement.

The labor force participation rate can help aid policymakers in making forward-looking decisions:

Among fundamental indicators, the LFPR isn’t a market mover (in the short term, anyway). But without it, a comprehensive picture of the labor market may be incomplete. The LFPR is a key piece of the labor puzzle—and key indicator of long-term economic trends.

Consider using the labor force participation rate as your big-picture framework when analyzing jobs data—especially the unemployment rate. And if you want to analyze longer-term labor trends, look beyond the headline numbers—dig deep into the demographic and structural changes that may be driving the rate up or down.

The labor force participation rate may not be the star of the jobs reports, but it’s critical to getting a fuller view of the labor market, particularly longer-term trends. Participation trends (whether rising, falling, or variable) can either exacerbate or mute the effects of unemployment trends.

For example, the unemployment spike during the 2007–09 Great Recession was particularly hard-felt because it came about just as the first baby boomers were entering their retirement years and moving out of the workforce—either by choice or by necessity. And although the official unemployment rate topped 14.8% during the COVID-19 economic shutdowns, the precipitous fall in the LFPR—perhaps due to a rise in labor force detachment—made the employment picture even more pronounced than the numbers would indicate.

If you actively “participate” in fundamental analysis, when the jobs report comes out each month, keep an eye on the LFPR.