When you hear that the unemployment rate has gone down, you usually think that the economy is doing better. Right?
But the numbers don’t always tell the full story.
This is what’s not said. If someone has gotten so frustrated that they’ve stopped looking for work… or just decided that they won’t work anymore, they no longer get counted as unemployed.
So, imagine you had a town with 100 people, and 10 of them were unemployed and trying to find jobs. The unemployment rate would be 10%. Make sense?
So now imagine if five of those people got tired of looking for jobs and decided to move into their parent’s basement… the government would now say that the unemployment rate has gone down to 5%. Yippee! Wait now…that doesn’t make sense.
The people in the basement are no longer part of the labor force because they’ve given up… so the labor force participation rate goes down too…
Not exactly a reason to celebrate.
So while the unemployment rate is important, the labor force participation rate, which as you can see, tells the real story.
Now that makes sense.
Remember this the next time you see a politician on the news talking about the unemployment rate getting better.