What is Economic Participation?

Published by Thomas Herold in Economics, Retirement

'Economic Participation' is explained in detail and with examples in the Retirement edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

Economic Participation refers to the labor rate of participation. This means that it measures the total active population participating in the labor force. Another way of saying this is that it pertains to the numbers of individuals which are actively seeking out work or who are already employed. The two categories are important to consider, as in economic recessions a number of active labor force workers will despair of finding a job and simply give up the search for employment. This means that the Economic Participation rate will decrease as this happens.

Such an Economic Participation rate is a key measurement to utilize when considering a body of unemployment statistics. This is because it reveals the numbers of those individuals who show interest in being a part of the active work force. Such people either have a job or are actively looking for one. They usually must be considered from 16 to 18 years of age or older to be eligible for inclusion in the category. Those individuals who are not physically capable of working or who lack the interest in working will not comprise the participation rate. This includes retirees, imprisoned people, students, and homemakers or stay at home moms.

This is an important metric to consider alongside the official unemployment rates. The reason is that many individuals who are called unemployed might not really be true participants in the active work force. If analysts only contemplate the unemployment rate by itself, they might arrive at the conclusion that a greater number of individuals are not bringing home income.

This does not meant that they are not actively contributing to the level of the economy. It might be that such individuals choose not to work for a variety of reasons. They could be spending retirement savings, building their skills as college or university students, or spending their spouse’s earnings as stay at home moms. It explains why both unemployment statistics and the Economic Participation rate should be reviewed together to fully appreciate the true employment picture of an economy and country.

This Economic Participation rate becomes even more critical to understand when recessions bite. As an economy goes from reasonably good to particularly bad, many workers will simply give up looking for work after many months unemployed. At this point, they could simply abandon the workforce. The labor participation rate would then decline. The reason is that these individuals would no longer be classified as actively looking for employment. This explains why in recessions, sudden plunges in the labor participation rate would be carefully considered and evaluated.

A case in point is the effects of the Great Recession on the ongoing Economic Participation rate. The labor force impact from this worst economic collapse since the Great Depression of the 1930’s proved to be absolutely devastating. The recession officially began in December of 2007. Per the NBER National Bureau of Economic Research, the unemployment rate stood at 5 percent that month. When the recession officially ended in June of 2009, this unemployment rate reached 9.5 percent and then climbed on to peak out at 10 percent by October of 2009.

In the eight years since then, the unemployment rate has nearly touched five percent again. Yet the labor participation rate has never recovered from the Great Recession. Many economists believe that this devastating recession and global financial collapse caused the acceleration of structural changes in the labor force participation rate. The rate has ranged from 67 percent back in 2006 to today’s near 62 percent in 2017.

The decrease in the economic participation rate has been broad based and consistent since 2009 in fact. Many baby boomers decided to retire early as their job opportunities suddenly evaporated. Many individuals used government grants and loans to go back to university or college. Some women stopped working to be stay at home moms as the job opportunities were so scarce.

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The term 'Economic Participation' is included in the Retirement edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.