What is Foolsaurus?

It's a glossary of investing terms edited and maintained by our analysts, writers and YOU, our Foolish community. Get Started Now!


Does the Labor Force Participation Rate Affect Investments?

Original post by Sue-Lynn Carty of Demand Media

The labor force participation rate is the number people who are of working age and have jobs or are unemployed and looking for work as compared to the total working-age population, represented as a percentage. The economic effects of the fluctuations of the labor force participation rate can affect investments. However, how these fluctuations impact investments depends on the circumstances as to why the labor force participation rate is increasing or decreasing.

Contents

Labor Force Participation Rate Elements

The labor force participation rate includes non-institutionalized working-age civilians. This means military personnel, incarcerated individuals and those living in any form of institutional environment are not included. The U.S. Bureau of Labor and Statistics considers those who are 16 and older to be of working age. BLS does not give an upper age limit. People who currently have jobs and those who are unemployed and are actively looking for jobs are included in the labor force participation rate. Those who are unemployed and not actively looking for work, such as retired people, are not included.

Labor Force Increase

When working-age people are entering the labor force at a faster rate than those exiting, the labor force participation rate increases. As a result, economic productivity and output rises, causing an increase in the gross domestic product. The GDP is the total market value of goods and services produced in the country. When the GDP rises, it indicates that businesses are expanding and the economy is growing. When this happens, prices on investments such as stocks tend to rise based on the expectations that corporate profits increase during economic growth periods.

Labor Force Decrease

When working-age people are leaving the labor force at a faster rate than those entering, the labor force participation rate decreases only if those who are leaving are not looking for new work. For example, if there are 100 working-age people and 75 of them are working, it makes the labor force participation rate 75 percent. If 10 people exit the work force and are not looking for additional work, the rate decreases to 65 percent. When this occurs, employers often have to increase their wages to attract quality employees. Higher wages and labor costs eat into corporate profits and can cause a decrease in investment prices.

Considerations

The labor force participation rate is an economic statistic regarding the supply and demand of labor in the overall economy. It is only one component of many used in the evaluation of overall economic growth and contraction. Knowing all of the components have an effect economic output and the GDP and using that knowledge in conjunction with the labor force participation rate can help you gain a better understanding of how all of these factors combined can affect investments.


                   

References

About the Author

Sue-Lynn Carty has over five years experience as both a freelance writer and editor, and her work has appeared on the websites Work.com and LoveToKnow. Carty holds a Bachelor of Arts degree in business administration, with an emphasis on financial management, from Davenport University.


Advertisement