Feb 01, 2018

Stronger Economic Outlook Suggests Workers May Rejoin the Labor Force

Post by Derek Yale

Each month, the Bureau of Labor Statistics (BLS) releases a look at how the U.S. workforce changed over the previous month. Periodically, these releases will show that the unemployment rate increased alongside a growth in the labor force. While a rising unemployment rate seldom gets good news coverage, it could be driven by more workers reentering the labor force in search of jobs; an indication of a stronger overall economic outlook. Most recently, this occurred during June 2017, when more workers rejoined the labor force and the unemployment rate subsequently increased. This shows that when evaluating the state of workers in America, it is important to look at all the underlying factors.


The civilian noninstitutional population – the “universe of labor force data,” according to BLS – is comprised of individuals that are employed (working), those that are unemployed (people who are jobless, but looking for work), and individuals who are not considered to be a part of the labor force. Those not in the labor force include discouraged workers (individuals who are not actively looking for work because they think none is available), as well as individuals who looked for a job in the past year, but have not looked in the past four weeks.

BLS uses these numbers to derive two important ratios that give an overview of how the labor force is functioning. These include the labor force participation rate (share of the population that is considered to be a part of the labor force), and the unemployment rate (the share of the labor force that is looking for work, but unable to find a job). While BLS generally attributes long-term changes in labor force participationto an aging population and educational attainment, a short-term increase could indicate more discouraged individuals renewing their job search.

As individuals that have given up looking for work begin to see signs of the economy improving, they will most likely search for employment opportunities. As soon as these individuals begin looking for a job, they are considered unemployed and a part of the labor force. In turn, this could drive labor participation higher because more of the population is either working or looking for work. Further, the unemployment rate could increase because these individuals will be transitioning from not in the labor force to unemployed. An increase in those individuals looking for work, but are jobless, would increase the unemployment rate.


Economists and researchers have arrived at similar conclusions. According to the Pew Research Center, “[i]n any given month, the unemployment rate can rise or fall based not just on how many people find or lose jobs, but on how many join or leave the active labor force.” The Washington Post’s Ana Swanson said of June employment report this past summer, “[t]he unemployment rate ticked up to 4.4 percent, from 4.3 percent in May, but it did so for a good reason — more people joined the labor force to look for work.”  And this past July, Tim Worstall of the Adam Smith Institute noted, “[i]f jobs are up, the unemployment rate is up, wage growth is subdued and labour force participation rising then we’re still pulling the discouraged into work and not facing labour shortages.”


When looking at the overall health of the economy, the underlying data is just as important as the headline numbers in trying to understand what’s going on. As sidelined workers become encouraged by a stronger job market, they could temporarily fill the ranks of the unemployed as they find and transition back into jobs. The Tax Cuts and Jobs Act is already making a real difference for businesses and millions of employees and their families and is poised to transform the American economy. To date, over 100 companies have announced investments in their employees, meaning more take home pay and jobs. We will continue to monitor the benefits that continue to take shape.