Job seekers giving up: Labor force participation rate falls to lowest in 50 years, outside of Covid era

On the surface, a June drop in the unemployment rate helped provide some upside to what was an otherwise downbeat jobs report — but it was for all the wrong reasons.

That’s because the decline in the jobless level to 4.2%, the lowest in a year, came largely from an exodus of workers from the labor force, according to the Bureau of Labor Statistics data Thursday.

In fact, the measure of the working-age population either employed or looking for a job slid to 61.5%, the lowest since March 2021. Excluding the Covid-era jobs market, it was the lowest labor force participation rate in exactly 50 years.

The decline in the labor force marks a “massive exodus” driven by multiple factors, said Mike Reid, head of U.S. economics at RBC.

“The unemployment rate fell to 4.2% as both the number of unemployed workers and the size of the labor force pulled back,” Reid wrote in a post-report commentary. “This may well be a story of retirements but could also be a story of prior job seekers dropping out of the labor force.”

Within the bureau’s household survey, where the participation numbers are drawn, is a story of a consistently contracting labor force potentially driven by unemployed workers simply giving up.

In June alone, the labor force, a measure of those either employed or not employed and looking for work, plummeted by 720,000. Similarly, the rolls of those counted as not in the labor force, a group that includes the unemployed and those not looking for work, jumped by 832,000.

And while the establishment survey, which counts jobs filled, showed growth for the month of 57,000, the survey of households, which counts the actual level of those working, tumbled by 507,000.

On a year-over-year basis, the labor force is down by just over 1 million, while the level of the employed also has fallen by 1.06 million and the ranks of the unemployed have risen by 40,000. The employment-to-population ratio slipped to 59% in June, the lowest since October 2021. All that has happened while the unemployment rate has risen by just one-tenth of a percentage point to 4.2%.

“What really affects me is not so much the unemployment rate,” said Dan North, senior economist for North America at Allianz. “What’s an important development is the participation rate, and this is a big leg down in one month, and over the past year it’s a pretty big leg down. I think this is a more important number.”

The drop in participation is sometimes attributed to a shrinking immigrant population and retiring baby boomers and Gen Xers.

However, in June the biggest plunge came from what is defined as “prime age” workers, or those between the ages of 25 and 54. That rate fell 0.6 percentage point to 83.3%, its lowest since December 2023.

“Looking at the statistics now, that argument doesn’t hold up so well,” North said of the retirement and immigration rationale. “I hate to use the word ‘alarming,'” he added, but said the numbers are cause for concern.

To be sure, some economists said the June numbers seem out of sort. Specifically, they cited the large decline in leisure and hospitality workers as a sign that the data could be noisy.

But the participation numbers are part of a continuing trend.

“It was shocking to see 720,000 people stop looking for work entirely and the hospitality sector shed jobs,” wrote Heather Long, chief economist at Navy Federal Credit Union. “It’s a better job market than a year ago, but opportunities are limited.”