Politicians from both sides of the aisle frequently speak of the unemployment rate as an important economic indicator. And indeed it is. However, there is some amount of deception involved in reporting this rate. Whether the deception is purposeful or not is up to voters to decide. Regardless, it should be understood that the labor force participation rate is far more important than the unemployment rate.
In simple terms, the labor force participation rate is a ratio comparing the number of people legally and physically able to work to those who are actually working. If you have a group of five healthy adult males capable of working full-time, and only three are actually gainfully employed, the labor participation rate would be 60%.
Why is this number important? It is important because it takes into account the total number of adults in the United States capable of working. The unemployment rate accounts for only those adults who are not employed AND are currently looking for work. As Gallup CEO Jim Clifton explained in a February 2015 blog post, the unemployment rate officially released by the BLS every month DOES NOT account for:
- the unemployed who have given up looking for work
- the unemployed who work a minimum of one hour per week
- part-time workers who want, but cannot find, full-time work (underemployed).
When factoring in all of these people, the real unemployment rate is generally much higher than that which is reported by the BLS. Unfortunately, the practice of underreporting the real unemployment rate has been going on for decades. It is more politically expedient to leave out the underemployed and certain classes of the unemployed in order to paint a picture that is rosier.
By contrast, considering the labor force participation rate in conjunction with the unemployment rate gives us a more accurate picture of how things are going. Without the labor force participation rate included in the discussion, we are led to believe that things are better than they really are. This is not healthy for our economy.