Falling LFPR isn’t a huge deal

LFPR is low. That’s all over the news these days. Mostly just conservative pundits trying to downplay the economic recovery.

Now, there are good reasons to downplay the recovery. Zero percent interest rates for 80+ months with no end in sight—that’s a much better reason.

But that aside, the low (and even falling) LFPR alone just isn’t evidence of poor recovery. LFPR, as I’ve explained before, is sensitive to demographic shifts that don’t necessarily correlate with any economic trends in particular. Theoretically, a low LFPR is a long-term economic goal—more wealth means fewer people (especially 18-24 and 55+ year olds) need to work in order to maintain a certain quality of life. Stay in school longer, retire earlier, go fishing, chill-out, etc.

For example, the percentage of 16-24 year olds as part of the workforce has fallen since 1990, as college becomes attainable for more people. That’s good. The LFPR also fell dramatically over the past several hundred years, as capital accumulation made it possible for people to actually quit working when they get old, or to put off work until adulthood. Again, that’s good.

Also, LFPR fell almost every year from 1956 to 1964, during which time GDP grew by more than 50 percent. That’s really good.

So don’t worry too much about LFPR—at least not in the way pundits want you to worry. Vox has a good, well-balanced perspective.

In general, one index or metric never tells the whole story. Look for trends and patterns. Ignore the hiccups. Be generally optimistic.

Be careful with LFPR!

The Labor Force Participation Rate (LFPR) is calculated monthly by the Bureau of Labor Statistics (BLS). It’s defined by the BLS as “the labor force as a percent of the civilian noninstitutional population.”

This seems straightforward enough, but I’ve seen many analysts misinterpret what the LFPR actually measures–especially as it’s been in a sort of free fall for the past several years–and therefore misapply it when gauging the health of the labor force.

Here’s the key: For the BLS, the “labor force” includes everyone who is either employed or unemployed-but-seeking-employment. This means that LFPR, labor force participation rate, does not fall when more people become unemployed. It falls when people drop out of the labor force entirely.

In other words, LFPR changes only when the percentage of people not seeking work changes relative to the total number of working-age people.

Of course, some of those people dropping out of the labor force are what the BLS calls “discouraged workers“–people who are not looking for a job, but want and are available for work. In this case, a falling LFPR can indicate hard times. But recent research shows that such workers are not the biggest reason for the LFPR’s decline. Shigeru Fujita at the Federal Reserve Bank of Philadelphia shows that an accelerating rate of retirement, coinciding with the aging of America’s workforce, is behind much of the decline (which, for that matter, began in 2000–long before the 2008 recession). Of those who dropped out of the labor force for reasons other than either retirement or becoming disabled, those in school comprise the fastest subset of working-age people not seeking work.

So LFPR should never be used as a standalone measure of the health of the labor force. Nor can it’s decline serve as a “check” on the falling unemployment rate without analyzing the causes of that decline. Indeed, the LFPR fell almost every year from 1956 to 1964, during which time GDP grew by roughly 50 percent. Same story between 1998 and 2008.


To conclude, I’ll pose an interesting question: Should we expect LFPR to rise or fall as the population becomes wealthier in general? Will more or less people be working in, say, the year 2100, when (I hope) we’ll be more productive than we are today? (Hint: The answer has to do with the labor-leisure trade-off.)

Jobs report gains, LFPR loses

MarketWatch is reporting that the U.S. economy added 288,000 jobs in April. Numbers for February and March were both adjusted up based on new data. The unemployment rate is now 6.3% — lowest since September 2008.

I’ve written before that the Fed had turned reports like this into red flags for markets. Investors feared an end to stimulus more than they rejoiced at news of added jobs. But I expect things to be different this time around, as the Fed dropped their 6.5 percent unemployment threshold (which signaled the beginning of taper) in mid-March, choosing instead to use a more holistic and “qualitative” view of unemployment to gauge the health of the economy and signal an end to stimulus.

Today’s jobs report also revealed that the labor-force participation rate (LFPR) has dropped to a 35-year low. Business Insider’s Sam Ro writes, “Bottom line, the drop in unemployment is not just about job creation; it’s also about fewer people looking for work.”

I’m not saying the economy isn’t actually improving or that today’s good news is nothing to be exciting about. I just want to emphasize the importance of examining other associated metrics when the unemployment rate is published. After all, if the LFPR falls ceteris paribus, the unemployment rate will decrease despite a net decrease in the number of Americans who are employed.