Labor Participation Rates and Potential for Job Growth

Jobs

A third of Americans of working age are not actively seeking employment, and it may seem that if we increase participation, we will grow the economy. It’s not that simple though.

The participation rate in the workforce is one of the metrics that is looked at when we comb through the results of nonfarm payroll reports, and this does have some bearing on how we interpret the health of the current job market.

Tracking the total amount of jobs out there is still the most important thing, but this factor doesn’t just indicate how much opportunity there is out there for jobs, it also involves the market’s ability to fill these jobs. Jobs not filled don’t make it into new jobs reports.

The more people who are actively seeking work, the more opportunity there is to fill these positions, and while employers usually do not have trouble doing so, there are cases where no suitable candidate can be found, or even opportunities that no one applies for.

There is also a qualitative aspect to look at, since jobs pay differently. What we want here is the aggregate payroll numbers going up, and not necessarily just more new jobs added. We look at trends in average wage here, because this at least suggests that the net effect is to increase payroll numbers.

From a macroeconomic perspective, it’s how much money that is paid out in wages in total that matters, which seeing the average wage does tend to support, but still doesn’t tell the whole story. When we add in the total size of the workforce, this brings what we really need to know together.

It’s the Number of Employed That Matters, Not the Number of Unemployed

People also look at the unemployment rate, but this also depends on how many people are actively seeking jobs. The unemployment rate can go down because a higher percentage of the workforce is employed, and it can also be increased due to people giving up or dropping out for other reasons such as retirement, going back to school, to become a full-time parent to their kids, and so on.

Provided that the size of the workforce hasn’t changed much, looking at trends in unemployment can provide us with some additional insight, and is certainly a number that garners quite a bit of attention apart from the main new jobs figure.

The participation rate also does matter, but to a lesser degree. All things being equal, increasing the percentage of the working age population actively seeking a job doesn’t create any new jobs, it just adds to the unemployment rate.

The current size of the U.S. labor force as of February 2019 is 163 million, with 157 million currently employed, and 6 million looking for work, leaving us with an unemployment rate of 3.8%. There are 258 million Americans of working age, leaving us with a 63.2% participation rate, the percentage of people that are of this age and are also in the labor force.

Need does factor into this though, and if more people need to work to survive like we see in poorer countries, the participation rate may end up being higher out of necessity. In a sense, not being in the workforce can be seen as a luxury generally, where in most cases anyway people aren’t participating because they both do not want to or need to, being sufficiently well-off already, in their estimation at least.

There are plenty of cases where people simply cannot work, due to a disability or illness, or may have been actively seeking employment but ended up withdrawing from the labor force due to losing their resolve. If one is able to work and isn’t seeking a job though, this means that the threshold of their needing to work would obviously be lower, where they may have been looking to improve their situation but could still get by without it.

Raising Participation Rates in Itself Isn’t Particularly Meaningful

The key here is to realize that if we are looking to raise the participation rate and get more of these people into the workforce, they do have to be provided enough of an incentive to do so, and we can assume that, among those who could participate, their remaining out of the workforce means that this incentive isn’t high enough.

Expanding the job market may provide that incentive, especially a qualitative improvement. Creating higher paying jobs raises the bar here, the potential compensation level that they require to be high enough to tip the scales and have them applying for jobs. The quantitative side also influences this, where more jobs available in one’s field or scope of interest may also cause more applicants to step forward.

Other things may influence this, such as improving one’s education and skills such that the jobs that they now aspire to may pay sufficiently well, or with their getting government support to help care for their children, freeing them up to work. None of this actually does much to create any real expansion in the jobs market though, because desiring a job and having one out there to take are separate things.

A participation rate that only has 2 out of 3 people engaged does tempt some people to look at the potential improvement in growth that could be achieved if this rate was increased, but we cannot just say that if only more people joined the labor force, these benefits would accrue.

There also has to be a corresponding growth in the labor market, the number of jobs available out there, to have this result in more hiring, otherwise all we’d really end up with is more people actively seeking work unsuccessfully, or displacing others already in the labor force should they be successful.

While more applicants in itself may influence the number of jobs filled, the effect would be small, and we need to keep in mind that we already have an excess of labor, evidenced by the number of people already unemployed, even though this excess may be historically low. Some of this unemployment is a result of people transitioning, but most of it is people who want a job and cannot find one.

The key to more jobs is more job creation, and if the current labor market cannot fill them all, it is at this point where we may look to an expansion of the number of people in the labor force to fill these vacancies.

We do break down participation rates by gender, which isn’t really all that significant from a labor market perspective, although it certainly is to those who seek to promote more gender equality. These people have told us that if the participation rate among women rose to that of men, we’d see a 5% increase in GDP, which would be very significant.

It’s not that simple though, because if more women chose to enter the workforce, this does not mean that these new jobs would just magically appear and they would all be given one, which would be necessary to see this rise in GDP. What we would see instead is more women moving from being unofficially unemployed to making this official, or just taking the place of others already enumerated in the statistics.

This would happen regardless of one’s gender, which isn’t even a pertinent criterion here, other than for the sake of looking to root out the degree of gender bias that exists when it comes to hiring. This is an important issue culturally, but it really doesn’t have anything meaningful to say to the economics side of things, potential increases in GDP or the size of the job market and such.

We do need to distinguish the difference between more people seeking work and more people employed, and while they are related, there isn’t the causal relationship between them that some people appear to think.

The only real way to have more people employed is to have more jobs, and if we did have an actual labor shortage, where the current supply of labor would not be sufficient to satisfy demand, then we would be able to say that more people signing up could drive up employment numbers, by the number of new jobs this increased participation resulted in.

We are not here yet though, but even if this does happen, this does not mean that enough room will be created to allow for the percentage of women participating in the labor market to fill the 13% gap they currently have with men. Among other things, that’s a lot of new jobs, and we need to answer the question of where these jobs will come from before these dreams of GDP growth can ever become a reality.