Labor force and unemployment

The labor force consists of all noninstitutionalized individuals aged 16 or above who are either working or actively seeking work. Those who choose to be full-time students, or retire, or withdraw from the labor force for child-rearing purposes, or who give up looking for work are not counted as part of the labor force

Individuals are unemployed only if they are not working for pay at any job and are actively seeking work.

The unemployment rate is defined as:

The unemployment rate generally rises during recessions and falls during periods of economic expansions. When unemployed workers become discouraged and leave the labor force (these workers are called discouraged workers), the measured unemployment rate declines. (To see this, observe that while both the numerator and the denominator in the equation above decline, the fraction declines because the numerator falls by a larger percentage.) Thus, the unemployment rate may decline when the number of discouraged workers rises. Similarly, the observed unemployment rate may increase when discouraged workers become more optimistic about the state of the economy and start looking for work.

Thus, to measure the state of the labor market, it is important to examine movements into and out of the labor force as well as changes in the unemployment rate. A convenient measure of this is provided by the labor force participation rate, defined as:

Typically, the labor force participation rate increases during periods of economic expansion and declines during periods of recession. Note that the changes that occur in the labor force participation rate over the course of the business cycle tend to dampen the fluctuations that occur in the unemployment rate. To see this, note that during a recession, unemployment rises. But because some workers become discouraged, unemployment does not rise by as much as it would if the labor force participation rate were constant. Similarly, during an expansion, unemployment rates decline, but the decline is smaller due to the increase in the labor force participation rate that generally occurs when an expansion occurs.

It is important to know the unemployment rate with the number of people eligible to receive unemployment compensation. While all of those who receive unemployment compensation are legally required to be unemployed, a worker could be unemployed but not eligible to receive unemployment compensation (since eligibility is not available to those who voluntarily quite their job or who have not worked for a long enough time period prior to being laid off).

An examination of unemployment statistics during the past century indicates that unemployment rates in the latter half of the 20th century were, on average, higher than those during the first half of the century. The variation in unemployment rates, however, has been much lower since the end of the Great Depression. The increased level of the unemployment rate may be the result of higher rates of structural unemployment or may be due to the reduced cost of being unemployed (as a result of the introduction of unemployment compensation). The reduced variation in unemployment rates are generally seen to be the result of improvements in macroeconomic policy decisions by the government.

During the past 50 years, the labor force participation rate for males has declined slightly. This is, however, true primarily for relatively young and relatively old males. The decline in male labor force participation rates is due to increased years of educational attainment and retirement decisions.

The labor force participation rate for females has increased rather dramatically during the same period. The largest increase has been for married females (partly because single and divorced females always had relatively high labor force participation rates).