Best Relationship between Changing of Labor force and the Unemployment Rate

Posted on Posted in Essay, Micro & Macroeconomics, mla

Statistics indicate that the labor participation rate in the US will remain broadly flat. With the US recovering from economical decline, experts predict a cyclical boost to the labor participation rate. However, the experts argue that the economy will experience structural decline in the labor participation rate because of the demographics. This paper will examine the effect of changes in the labor force on the employment rate.

The recent census in the US indicate that there are very few numbers of prime working age workers, that is workers in the age bracket (25 to 54) years. Majority of workers are either young or old. The labor participation rate for women is lower than originally estimated. Experts argue that the number of women in the labor force will increase as soon as the economy recovers.

The labor participation rate often affects the unemployment rate in the economy. It is important to note that with lower labor participation rate, with same level of unemployment, there will be lower unemployment rate (McBride 1).

The table below indicates the unemployment rate based on the labor participation rate in 2012.

Table one: Unemployment rate based on labor participation rate adopted from (McBride)

         
    63.4% 63.7% 64%
Jobs added per month (000s) 150 7.6% 8.0% 8.5%
200 7.2% 7.7% 8.1%
250 6.9% 7.3% 7.8%

 

If the employment growth could continue, for example 250,000 jobs a month in 2012, and the participation rate (63.7% in 2012), statisticians predicted a 7.3% fall in December 2012 (McBride 1). .  Therefore, the higher the labor participation rate, then there will be reduction in unemployment rate.

A fall in labor participation rate leads to increase in unemployment rate. With increase in labor participation, there will be reduction in unemployment rate as illustrated in the table below.

Table two: Unemployment projections of Federal Reserve Governors and Reserve Bank presidents adopted from (McBride)

Unemployment rate 2012 2013 2014
Projections 8.5 8.1 7.6

 

This study will be useful in explaining why changes in the labor force will mask gains in the jobs situation (McBride 1). Currently, the unemployment rate has reduced significantly, since the Great Recession. However, the labor force has not changed. A research by (McBride 1) defined the labor participation rate as the percentage of working-age Americans who are either working or looking for jobs. Statistics indicate that the labor participation rate is at a 35 year low. Many people lay the blame for this rate to the economy, which has not been constant. Experts argue that the fall in unemployment rate is because of decline in labor force participation (McBride 1).

Reports indicate that the US labor force has changed positively because of demographics. Additionally, the same reports indicate that the US labor force keeps shrinking.  During the previous years, the unofficial unemployment rate kept dropping even though job creation has been relatively soft (McBride 1). For instance, during the past four months, the U.S government created 150,000 jobs a month (McBride 1). However, the unemployment rate has been dropping precipitously. What is the reason for this? From early last year, 350,000 people left their jobs (McBride 1). The official unemployment rate accounts only for those workers who are seeking jobs. Therefore, the employment rate was lower.

When the labor force is changing, there are reasons to account for this. The main reason is that, the older generation is retiring, the younger generation is going back to schools, and many workers discouraged by the weak economy.  Below is a discussion:

  • The ageing population: The labor participation is changing because most of the long-run demographic trends do not match the current economy. During the past, more women were entering the labor force, and there were improvements in health and information technology. Many people, during this time, worked for more years. However, in recent times the labor force has been declining because the working generation is retiring.
  • Bad economy: Many workers stay in schools in times of bad economy. This is the case where the demographics are proven to be wrong. Demographics in the past predicted an increase in the labor force. However, with the issue of bad economy, the numbers of people working have fallen. When the economy is bad, workers prefer to stop working, and the unemployed prefer not to look for jobs. This means economies will be faced with the challenge of student debts.

Therefore, changes in the labor force are common in economies, and this affects the rates of unemployment. Nowadays, many people are dropping out of their jobs for reasons such as the growing ageing population, and bad economy (McBride 1).

Work cited

McBride, Bill. “The impact of changes in the participation rate on the unemployment rate.” Calculated risk (2012): 1-2.Print

 

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