Business Coach and Freelance Financial Writer
According to economists, there are four factors of production that go into creating higher quality goods at lower prices. These are
- Labor
- Land
- Capital
- Entrepreneurship
The ability to measure these factors provides insight into the state of the economy. For example, the economy has slowed down in the last two years due to lower levels of productivity. Yes, capital and entrepreneurship play a minor role in the economy’s regression. However, in 2022, one of the primary business concerns is labor, specifically the employment participation rate.
What is the Employment Participation Rate?
The employment participation rate, also known as the labor force participation rate, is
the percentage of eligible working adults who are currently working or actively looking for a job.
BLS
The labor force participation rate is a civilian metric that is used by private and non-profit businesses to make recruiting and hiring decisions. Because this rate can be national or regional, it gives businesses insight on what labor markets are booming, which helps target active and passive candidates.
How to Calculate the Employment Participation Rate
Labor Force (Employed + Unemployed
Civilian Non-Institutionalized Population
The formula for calculating the employment participation rate is simple. The first variable is the labor force, which is the number of eligible working adults. The Bureau of Labor Statistics defines an eligible working adult as
“any non-institutionalized civilian male or female, between the ages of 16 and 64, who is working or has actively looked for some form of employment in the past four weeks.“
This definition of eligible working adults includes employed and unemployed people that are seeking work. Therefore, you will calculate the labor force by adding the number of employed people to the number of unemployed people. Then, you will take that number and divide it by the number of non-institutionalized civilians in the selected geographical area. This is basically taking the population of people who are NOT:
- incarcerated
- in a long-term care or mental health facility
- government workers (including active military personnel)
Labor Force Participation Rates Since Y2K
To understand the fluctuations of the labor force participation rate and how it impacts us today, it is important to take a look at how it has changed in the last decade or so.
Starting in April 2010, the labor force participation rate in the United States was 65.2%. Even though this was a recovery period after the Great Recession, we saw that number steadily declined until it hit a low of 62.4% in September 2015. The slow economic growth in 2015 preceded four years of the US economy’s rapid growth and stabilization. Due to more movement in the economy, the labor force participation rate started to gradually increase again, hitting 63.4% just before the crash of 2020.
In April of 2020, during the height of the pandemic, many employees were getting laid off, fired, and quitting their jobs. As a result, the employment participation rate dropped to 60.2%, down from 63.4% four months earlier. Since then, we have seen the Labor Shortage in 2021 and the Great Resignation in 2021/2022 causing the employment participation rate to fluctuate. As of writing this article, it currently stands at 62.2% – still lower than pre-pandemic calculations.
This cannot be attributed to jobs availability. In 2021, the unemployment number for the year was 3.9%, and GDP growth was 5.7%. That means that there are jobs are out there. Businesses of all sizes, particularly those in service industries, are struggling with labor shortages that are reducing profit margins and forcing existing employees to work more hours to stay afloat. So with so many jobs available, you can’t help but wonder why the employment participation rate struggles to remain on an uptick.
Why are Eligible Workers not Working?
According to BLS labor statistics published in February of 2022, total employment is 2.6% below where it would have been had we not had a global pandemic in 2020. According to their projections, there should be 4.1 million more people working right now. At last count, US businesses have over 10 million job openings, so that’s not the problem. When put in perspective, we can narrow this down to four potential causes.
Childcare
Some of this can be attributed to the high cost of childcare and the increased need for homeschooling. Forty-seven million workers quit their jobs last year and 4.3 million people a month have been quitting since then. 45.7% of them are workers with children. That’s a telling number, but it doesn’t paint the whole picture behind the labor shortage.
Concerns About Covid
A labor force study conducted by the Bureau of Labor Statistics this past January revealed that 1.12 million people have chosen not to look for work due to concerns resulting from Covid-19. The Omicron variant, vaccine mandates, and school closures were cited. Preventative measures to stop the spread of Covid-19 have now become reasons to stay home and not work.
Government Incentives
Compounding the problem are government policies and incentives that reward people for not working. Many of these have expired or were one-time events like the stimulus payments awarded during the pandemic, but extended unemployment insurance benefits programs and increased welfare and disability claims have exacerbated the situation.
Less Work From Home Options
During the last two years, people have reaped the benefits of working from home. In a labor pool where people are freelancing, switching careers, and looking to take the next step in their career, work from home options are still the first choice. For many, it is the only choice. In addition to demanding work from home and hybrid schedules, workers are also exercising their negotiation skills for better working conditions, pay, and benefits. Candidates would rather not work than to be somewhere where they aren’t getting what they want.
The Economic Effects of a Labor Shortage
A stagnant employment participation rate, coupled with eligible workers shying away from committing to a job, has produced a labor shortage that has lasted throughout the duration of the pandemic. This creates a problem for the US economy because labor shortages limit the production or service output of businesses. It also puts undue strain on existing employees, who are forced to work longer, laborious hours.
As a result,
- Profitability decreases and prices increase, which leads to inflation,
- The Federal Reserve Bank will continually raise interest rates to curb that inflation and
- The stock market begins experiencing massive selloff because investors want to save their money
Ultimately, when you think back to the four factors of production again – labor, land, capital, and entrepreneurship. These are all affected by labor shortages. Land can’t be purchased without profits, capital isn’t available for businesses with shrinking margins, and the entrepreneurial spirit is dampened in an environment where you can’t get people to come to work.
So, to avoid or cope with the consequences of a labor shortage, it seems to be up to the government and businesses to pose solutions that can help drive up the labor participation rate.
What’s the solution to the problem?
Ranting about the problem doesn’t solve anything. Getting the employment participation rate back up to where it needs to be will require a collaborative effort between government and private industry, added to a bit more effort from eligible workers who aren’t currently employed. The following are solutions that have been proposed for doing this:
- Reduce employment taxes: Losing a third of your paycheck to state and federal taxes is not a very good incentive for going back to work. Lowering taxes would entice more people into entering the labor force again. One way to do this would be to eliminate some of the incentive programs that make it more cost effective not to work.
- Create more remote work opportunities: Tech companies like Google and Facebook recognized the value of a remote workforce during the pandemic. Both have instituted work-from-home programs with flexible work hours. Those people are working. They’re just not commuting into the office. More jobs like that are needed.
- Expand and subsidize affordable childcare: It’s cheaper to stay home and take care of your children than it is to go to work and pay for daycare. This must change if we want to see employee participation go back up again. Childcare can be made more affordable by subsidizing it with government or employer funding.
Projections for 2023 and beyond
There are too many variables to accurately predict what the employment participation rate will be in 2023. Rising consumer prices may necessitate a return to work for many who are unemployed right now, but daycare and taxes are compelling reasons to stay home. Change is necessary to improve the numbers. Let’s hope we’re not the only ones who see that.
