Breadcrumb

Labor Force Participation Rate Explained

Written by

The GoCardless content team comprises a group of subject-matter experts in multiple fields from across GoCardless. The authors and reviewers work in the sales, marketing, legal, and finance departments. All have in-depth knowledge and experience in various aspects of payment scheme technology and the operating rules applicable to each. The team holds expertise in the well-established payment schemes such as UK Direct Debit, the European SEPA scheme, and the US ACH scheme, as well as in schemes operating in Scandinavia, Australia, and New Zealand. See full bio

Last editedJan 20212 min read

When you own a business, your knowledge of your market can mean the difference between success and failure. That doesn’t just mean gauging interest in your products and services. It also means gaining a broader understanding of the economic health of your market. This could be your city, your country, your continent, or even the world. The labor force participation rate is a metric that helps you to understand how much of the population in your market is economically active. This means that they are either in work or seeking / able to work.

Here, we’ll take a close look at how to calculate the labor force participation rate, and why it’s important for business owners to know.

Calculating the Labor Force Participation Rate

The Labor Force Participation Rate formula is a more reliable indicator of economic health than the unemployment rates. This is because unemployment rates do not take into account those working-age adults who have voluntarily dropped out of the workforce. It also omits those in military service or those in institutions such as prisons or nursing homes.

So, how do we calculate this metric?

We take the overall labor force (both employed and unemployed)
And divide it by the overall civilian non-institutionalized population

This information can be obtained from the Bureau of Labor Statistics.

For the sake of clarity, however, let’s go over the terms mentioned in the calculation.

Labor force

This is the total number of both employed and unemployed working-age adults. Pretty self-explanatory!

Employed

Anyone aged 16 or over who, in the last week, worked at least an hour or more as a paid employee. It also encompasses those who work 15 hours or more unpaid in a family business or farm. Each individual is only counted once, no matter how many jobs they hold down.

Unemployed

The unemployed includes anyone over the age of 16 who is available for work and has actively sought a job within the past four weeks. It includes workers who have been made redundant.

Civilian noninstitutional population

This group includes anyone in the population aged 16 or older, except for those who reside in institutions or are serving in the military. Institutions include jails, prisons, nursing homes, psychiatric hospitals, and correctional facilities for juveniles.

The current labor force participation rate

The labor force participation rate peaked at the turn of the millennium. However, a number of recessions over the following 21 years have resulted in a general decline, with many leaving the workforce as the baby boomer generation (who had caused much of the surge in employment in the mid-late 20th century) started retiring. Needless to say, the COVID-19 pandemic exacerbated this trend.

Nonetheless, the current climate provides a useful context to which we can apply the labor force participation rate formula.

Let’s take a look...

	Number (in millions)	Percent of population
Population (P)	261.23	100%
Not in labor force	100.66	38.5%
Labor force (LF)	160.57	61.5%
Employed	149.83	57.4%
Unemployed	10.74	6.7%

The labor force participation rate at the close of 2020 was 61.5%. At its peak in January 2000, this figure stood at 67.3%.

Why is it important for employers to know the labor force participation rate?

There are lots of reasons why employers and business owners may want to use the labor force participation rate formula. For starters, it’s a good way to get an overview of the overall health of the economy. High employment means that people have more money to spend, which means more marginal propensity to consume – a very important metric for consumer-facing businesses.

What’s more, because it shows how much of the population is either working or actively looking for work, it’s important to know the stats when recruiting. It can give an indication of how much competition there may be for a key position. So you can make an informed decision whether to carry out the recruitment yourself or to outsource.

We can help

If you’re interested in finding out more about calculating an Effective Annual Interest Rate, then get in touch with the financial experts at GoCardless. Find out how GoCardless can help you with ad hoc payments or recurring payments.