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What We Can Learn by Looking at the Labor Force Participation Rate

Labor force participation rate

The labor force participation rate is a very important metric to understand when thinking about hiring and management practices within your organization. Many business leaders will use an analysis of employment and unemployment data to make predictions and decisions regarding hiring so it’s important to have an understanding of the LFPR metric.

Understanding the Labor Force Participation Rate

The labor force participation rate measures the number of people who are currently employed or actively looking for work in the job market. It omits members of the military or those who are institutionalized in prisons, nursing homes, or mental hospitals and includes everyone 16 or older, comparing the proportion of those who are either working or actively seeking work to those who are not.

To calculate the labor force participation rate is to divide the sum of everyone who is working or seeking employment by the total number of non-institutionalized, civilian working-age population. In September of 2020, it decreased to 61.4%, according to the United States Bureau of Labor Statistics. While this was up from a low of 60.2% in April, it was also two percentage points lower than the rate in February.

Obviously, the economic recession of 2020 has a lot to do with the current labor force participation rate, but demographic changes have impacted the labor force even before the recession. It is said that it’s not likely it will return to the 2000 peak of 67.3%. There are several factors that play into this:

  • Baby boomers are leaving the workforce – and the decline in labor participation from 2007 to 2014 was largely due to the aging of the workforce. Baby boomers represent a large percentage of the population so when they leave the labor market, there is a significant impact.
  • Jobs have dissipated from the labor market – Although the demand for low-skilled service jobs as well as high-skilled analytical positions has increased, demand for middle-skilled jobs has decreased. These jobs involve routine tasks that are easily automated.
  • Health issues have also impacted much of the American labor force – In states like Alabama, Louisiana, and Mississippi, especially, rates of labor force participation are particularly low because many people in these states report being too disabled or sick to work. Also, Yale professor Alan Krueger estimates that from 1999 to 2015, opioid dependency contributed to a 20% decline in the labor force participation rate for working-age men.

What this Means for Organizations

The labor force participation rate being low means that employers need to focus on strategies for developing current employees. There are several ways business leaders can approach this:

  1. Create a plan for individual employee development – The first thing business leaders need to do when developing employees is to create an individual development plan based on that employee’s interests and long-term career goals. With a clearer picture of where the employee wants to end up, it will be easier to understand what development activities that person should participate in.
  2. Give employees constructive feedback – While good feedback is honest, it does not mean criticizing or chiding. Feedback should be motivational; transparent about areas where an employee needs improvement but phrased in a way that will inspire them to think of creative ways to improve. Feedback should never be discouraging. Also, it shouldn’t only be reserved for employee reviews.
  3. Provide metrics to look at performance – It’s difficult to define how an employee can grow if there are no tangible measurements they can analyze. Employees also feel a deeper sense of accomplishment when performance metrics are met.
  4. Set a good example – If business leaders are continuing to develop both personally and professionally, it will be easier for employees to participate in activities that encourage development. It sends a message that continual improvement is important at all levels of the organization.

Looking to the Future

If 2020 has taught us anything, it’s that it’s impossible to be able to predict the future. However, as we prepare to go into 2021, many organizations are trying to predict what the future will bring. Will the introduction of the coronavirus vaccine bring increases in labor force participation? Or will rates of labor participation remain low throughout the year in 2021?

The United States Congressional Budget Office predicts that the labor force participation rate will fall to 63.0% in 2021. Economists have predicted we will not see pre-pandemic employment levels until 2024. It’s impossible to speculate, but organizations should do everything they can to improve their business performance with their current employees.

At POWERS, we help organizations with business performance improvement by focusing on frontline leadership, shop floor excellence, maintenance performance, and operationalizing your culture. Contact us today to learn more about how we can help you.

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About the Author

Sean Hart

CEO, Managing Partner

Sean Hart is an industrial engineer with a background in manufacturing supervision and project management. Sean’s background is in improving overall plant efficiencies and implementing Lean techniques to improve processes.