Participation Rate vs. Unemployment Rate: What's the Difference?

The participation rate and unemployment rate are economic metrics used to gauge the health of the U.S. job market. The key difference between the two indicators is the participation rate measures the percentage of Americans who are in the labor force, while the unemployment rate measures the percentage within the labor force that is currently without a job.

A citizen is classified as a member of the labor force if he has a job or is actively looking for a job. The participation rate is the percentage of adult Americans, excluding active-duty military service people and those incarcerated or otherwise institutionalized, who are members of the labor force. The 21st century has seen a steady decline in labor force participation. In 2000, it was 67 percent; by early 2019, it had fallen to 63.2 percent.

Many economists argue the labor force decline is the result of low-skilled workers losing their jobs to outsourcing or automation, having no success finding new employment, and therefore dropping out of the labor force entirely. For this reason, they feel the participation rate is a more accurate measure of the state of the job market than the unemployment rate.

However, there are a number of reasons why adult Americans might choose not to participate in the labor force. Students, stay-at-home parents, and the retired may choose to keep themselves out of the workforce, for example.

The unemployment rate does not consider discouraged workers, defined as those unemployed workers who would like to work but have given up looking for work altogether, usually because they believe that there are no jobs available.

The unemployment rate only considers those in the labor force. For the purposes of calculating the unemployment rate, part-time workers are considered to be employed, even if they are involuntary part-time workers or part-time workers who would rather be employed full-time, but cannot find full-time employment due to inability to find full-time employment or lack of demand for their skills.

An unemployment rate of 5 percent means only 5 out of 100 workers in the labor force are without jobs. However, the unemployment rate does not consider those unemployed workers who have given up looking altogether, even though they want to work. In 2018, the unemployment rate was 4.0 percent, with 6.6 million people unemployed.

Taken together, the participation rate and the unemployment rate can provide a more comprehensive picture of the job market. A high participation rate combined with a low unemployment rate is a sure sign of a robust job market. During the late 1990s, the participation rate topped 65 percent, while the unemployment rate hovered below 5 percent. Most economists agree this was one of the best periods in modern history for American jobs.

However, the participation rate and the unemployment rate aren’t the only factors used to form a picture of the job market. The employment-population ratio measures the ratio of un-institutionalized adults 16 years of age and older who are employed. The employment-population ratio is less prone to vagaries caused by seasonal workers or those who experience temporary unemployment due to illness, temporary layoffs, leaves of absence, or other factors.