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Labor Force KPIs

Identifying metrics that helps us monitor the labor force

What is the Labor Force?

According to the International Labor Organization, a nation’s civil labor force refers to all individuals in a nation that meet the following criteria:

  • Are at aged between 16 to 64 years old
  • Currently, with a job or seeking a job
  • Are not serving in the nation’s military
  • Are not pursuing full-time studies at an academic institution
  • Are not retired

An individual who is available for work, meets the age and military restrictions, and is currently seeking a job is considered to be “unemployed.”

 

Labor Force

 

How can we monitor the labor force?

Governments and economists usually refer to three main key performance indicators (KPIs) to assess the strength of a nation’s labor force:

 

Unemployment rate

The unemployment rate is calculated by dividing the number of unemployed people in a country by its total available labor force. The number of individuals who are considered to be unemployed must meet the criteria described above, and be unemployed due to cyclical, structural and frictional factors. The equation to calculate the unemployment rate is:

 

Unemployment Rate

 

The unemployment rate, however, comes with a few shortcomings and there are debates ongoing about who should be counted as “unemployed.” For instance, there are debates over whether those employed on a part-time basis should be included in the calculation. Arguments for the inclusion of said group state that such individuals are technically employed, and should be included if they meet the criteria listed above. Those against state that part-time employment opportunities usually face very high turnover rates and thus is not a dependable source of long-term employment.

Another point of contention for using unemployment rate is that of discouraged workers. The category refers to workers that are out of a job and are unable to find suitable employment due to cyclical or structural factors. As a result, the group becomes very demotivated and ceases to look for employment, which artificially inflates the unemployed count. Since the size of the group varies quite significantly, reliable figures are difficult to generate and it is difficult to exclude the group from the unemployment calculation.

Nonetheless, it is generally agreed upon that a high unemployment rate is a signal of economic recession, whereas a lower unemployment rate generally signifies prosperous economic conditions. However, unemployment does experience a time-lag, meaning that changes in the economic state take time to be reflected in the indicator.

 

Employment-to-population ratio

The employment-to-population ratio (EP Ratio) measures the degree of participation that working-age civilians have in the labor market. According to the International Labor Organization, a civilian between the ages of 16 to 64 years old is considered to be of working age. The ratio can be calculated using the following formula:

 

Labor Force EP Ratio

 

EP ratios can also be calculated for specific age ranges in order to quantify the productivity of certain age brackets. For example, an EP ratio for civilians aged 16 to 25 years old would measure how much participation new workers have in the labor market.

 

Labor force participation rate

The labor force participation rate (LFP rate) is used to measure the degree of participation that the labor force has in a given economy. The LFP rate can be calculated using the following equation:

 

LFP Rate

 

Where the “total potential labor force” includes all civilians who have opted out of the labor force due to:

  • Voluntary military service
  • Early retirement
  • Enrollment in a post-secondary institution
  • Disability or sickness
  • Personal reasons

 

More Resources

CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To learn more about related topics, check out the following resources:

  • Economic Indicators
  • Employee Morale
  • Sense of Purpose at Work
  • Virtual Team

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