An opinion piece on the Fox website is calling for using the Labor Force Participation Rate (LFPR) as a gauge of economic health, rather than the Unemployment Rate.
As a labor economist, I understand all too well the problems with the unemployment rates. I discussed some of these in an earlier post.
As Fox points out, “The U-3 unemployment rate now hovers just over 8 percent. If those who have given up and have stopped looking for work were included, the unemployment rate would exceed 11 percent.” This is correct and is one of the biggest weakness of the U-3. It’s also why labor economists and others also like to look at the broader U-6 unemployment rate.
The U-6 rate isn’t perfect, either, of course. As Fox says, “Even the broadest measure of unemployment, U-6, fails to include the long-term unemployed who have been out of the job market for a year or more.”
I agree that during economic downturns, the LFPR may have some advantages over both the U-3 and the U-6. The trouble is that if you’re going to use one measure during downturns, you also need to the same measure during expansions, and economies expand much more than they contract. And the LFPR has a lot of problems of its own, especially during expansions.
The LFPR is heavily affected on the labor decisions of women, which in turn depend on women’s fertility decisions. If more women choose to have children, the LFPR goes down, even if those women are voluntarily choosing to have children because they feel positive about their future economic prospects.
If more people choose to get more education, the LFPR goes down. Fox seems to imply that there are negative aspects to this, and that it should be discouraged. That doesn’t make sense to me.
If more people choose to retire early because they’ve saved enough money and are tired of working, the LFPR goes down. Is this a bad thing? Or if people have to work until age 80 because their savings have dwindled, the LFPR goes up. Is this a good thing?
There are many good reasons for people to choose not to work, if they are making this choice voluntarily. While the LFPR is an important measure that should not be ignored, using it as a primary measure would encourage a number of policies that would not be our best interests over the long term.
Here is a graph showing both the U-3 unemployment rate and the LFPR since 1948. Which seems to provide the most useful information about the economy?
Warts and all, the U-3 and U-6 unemployment rates are still the best indicators of labor market performance.