While the sudden slowdown in jobs growth after many months of strong numbers is worrying and signals a weakening economy, a more long-term concern is the persistently low labor force participation rate that has not recovered in the decade since the onset of the Great Recession.
I’ve been studying labor market issues for over much of my 30 year career as an economist. Let me explain why you should be paying more attention to the participation rate.
Strong employment growth is important because getting a job is one of the best ways to improve a person’s economic standing. For this reason, slowing employment growth and rising unemployment are worrisome.
But while the unemployment rate is currently near a 50-year low of 3.6%, that statistic doesn’t tell the full story and can mask a deterioration in the labor market.
The participation rate measures all active workers divided by the working-age population. More importantly, it reflects people’s attachment to the job market – including their economic engagement and also, because a job is such an important part of a person’s identity, their overall well-being.
When people who are unemployed grow too discouraged and stop looking for work, it causes the participation rate to go down. But as a result, the unemployment rate goes down as well because it doesn’t include people who have given up. This makes the picture look better than it is.
From about the late 1980s until 2008, the participation rate fluctuated around 66% to 67%. But after the Great Recession, the rate dropped more 3 percentage points over the next seven years and has barely budged since. The latest jobs report shows it’s at 62.8%.