Question

Why does the labor force participation rate in an economy usually decrease during recessions? (Hint: The labor force participation rate counts both employed and unemployed workers, so the increase in the number of unemployed workers alone cannot explain why the labor force participation rate increases.)

Answer 1

The participation rate of labor force is an indicator of the effective population of an economy. The equation for the number is the amount of all employees divided by the total working-age population who are employed or actively seeking employment. The labor force participation rate is an important metric to use when analyzing data on unemployment as it calculates the number of people who are actively seeking jobs as well as those who are currently employed. It omits working-age people who are not looking for work or who are unable to work, including full-time students and homemakers, disabled people, prisoners and retired people.

It also omits people who have stopped their search for work. The labor participation rate will fall during an economic recession as many laid-off workers become discouraged and give up searching for jobs. This can make the labor force participation rate a somewhat more accurate statistic than the unemployment rate, which is often criticized for under-counting real unemployment because it does not take into consideration those who have unwillingly dropped out of the workforce.

It is commonly seen at the time of recession that the rate of participation in the labor force is decreasing. This is because economic activity at the time of recession is very small, leading to fewer jobs across the world. When there are fewer jobs, people are discouraged from concentrating on employment, resulting in lower participation rates. In understanding the unemployment rate in the economy, the participation rate is also essential. It is very important to regularly evaluate the rate of unemployment in the economy.

This downturn was due to broader changes in society and not to the economy's overall health. The retirement of a steady stream of baby boomers and a rise in enrollment at college at the younger end of the age spectrum are both factors that remove people from the total active workforce. There has also been a steady decline in international numbers since 1990. The global labor participation rate at the end of 2018 stood at 61.3 percent, down from 62.9 percent a decade earlier, according to the World Bank. At the end of 2018, Zimbabwe, Rwanda, Tanzania, and Cambodia were among the countries with the highest labor force participation rates. The lowest countries are Samoa, Timor-Leste

Those who are not interested in working or having some kind of job are not included in the participation rate, but the participation rate is carefully considered in order to better understand the unemployment statistics. An aging population could adversely affect any economy. That's when there's an image of the labor participation rate. It's a good sign if the frequency is on the higher side. But it can also serve as a warning sign for any economy if it is on the lower side.