Warning: The Unemployment Rate is Skewed - Real Time Insight

Zacks Investment Research
Posted: Apr 04, 2012 4:51 PM
Warning: The Unemployment Rate is Skewed - Real Time Insight

On Friday morning the government will release its monthly Employment Situation report. And investors will undoubtedly focus on the two big headline numbers: total jobs added and the unemployment rate.

Both of these numbers are important. And both have been improving since October. But there's another key data point also worth looking at: the labor force participation rate.

The labor force participation rate is the percentage of the population age 16 years and older working or actively seeking work. It does not count those who are discouraged and have stopped looking for employment.

The labor force participation rate rose steadily throughout the 1970s and 1980s as more and more women entered the work force. But as you can see below, it has fallen sharply since the Great Recession, and is still trending lower.

This explains at least some of the reason the unemployment rate has fallen over the last several months. But once people who were too discouraged to look for work dust off their resumes and start looking again, this could very well keep the unemployment rate elevated.

And there are long-term implications too: a lower labor force participation rate impacts long-run economic growth.

So before you cheer the headline numbers on Friday, make sure you dig a little deeper and look at this key metric.

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