What is a Participation Rate?
Participation rate usually refers to the portion of the economy's working age population that is in the civilian labor market.
How Does a Participation Rate Work?
The participation rate measures the number of people who are in the labor force who are working, willing to work, or are actively looking for work. It is the ratio between the active labor force and the overall size of the potential labor force (i.e. usually the population between the ages of 18 and 65).
Why Does a Participation Rate Matter?
The participation rate is an important measure of the civilian labor force. It does not include those who are not interested in working at this specific moment in time. The participation rate, therefore, is carefully watched by economists and investors as an indication of the direction of the economy.
The labor force participation rate explains how the unemployment rate can grow, even when new jobs are being created in an economy. For example, if new workers are added to the labor force (increasing the participate rate), but are not able to find jobs, the unemployment rate grows.