What is the Labor Force Participation Rate?

//What is the Labor Force Participation Rate?
What is the Labor Force Participation Rate? 2017-10-05T05:21:56+00:00

Definition: Labor force participation rate is the percentage of the population that is of working age and are also members of the work force. In other words, it’s the percentage of able working people who actually have jobs and are working.

What Does Labor Force Participation Rate Mean?

What is the definition of labor force participation rate? Economists most often use the participation rate to estimate the unemployment rate in the country. The participation rate formula is calculated by dividing the number of individuals in the labor force by the number of working-age individuals in the population and multiplying the derivation by 100.

This rate is important because it gives a measure of how active the economy’s labor force is and also sheds light on the true employment rate. To be categorized as a participant in the labor force, you would have to be employed or searching for work. People who are retired or stopped looking for work are not included. The rate tends to rise and fall with the cyclical nature of the economy. When the economy is down, participation rate will also fall. When the economy experiences a growth period, it will likewise be reflected in the rate.

Economic swings are not the only things that can affect the participation rate. Changing demographics can also play a role in the work force. As a population ages, it can have either a positive and negative effect on the rate. Retirement can mean new jobs and opportunities for the unemployed but if those jobs are filled, it can make the rate drop.

Let’s look at an example.

Example

If an analyst were to gather a group of 50 people into one room to represent a nation’s adult population and display how the participation rate is calculated.

They would have to make sure everyone in the room was of working age, not disabled, and mentally capable to work.

Next, to represent the labor force, they would separate 21 individuals from the group. To be in the labor force these individuals would either be currently employed or looking to be employed. To find the participation rate of this situation, the analyst would use this formula: 21 / 50 = .42 x 100 = 42%. Therefore, he would explain that according to his example 42% is the labor force.

Summary Definition

Define Labor Force Participation Rate: LFPR means the proportion of able-bodied individuals in an economy who are currently working or looking for work.