Labor Force

Published Dec 31, 2022

Definition of Labor Force

The labor force is defined as the total number of non-institutionalized civilians, aged 16 or older, who are employed or actively looking for work in an economy. That means it includes all working-aged people (both employed and unemployed) who are not active duty members of the Armed Forces, or institutionalized (e.g., in jail, prison, nursing homes, source: bls.gov).

Example

To illustrate this, let’s look at the example of a small town with a population of 10,000 people aged 16 or older. Of these 10,000 people, 8,000 are employed, 1,000 are unemployed and looking for work, and 500 are active duty military personnel, 200 are incarcerated, and 300 live in residential care facilities and nursing homes.

That means, of the 10,000 people, 1,000 are not currently part of the labor force (i.e., 500 + 200 + 300). Or in other words, the actual labor force of the town consists of 9,000 people (i.e., 8,000 + 1,000).

Why Labor Force Matters

The labor force is an important indicator of the economic health of a country. It is closely related to the unemployment rate, which is the percentage of people in the labor force who are unemployed. A high unemployment rate is usually a sign of an ailing economy, while a low unemployment rate is usually a sign of a healthy economy.
In addition, the labor force is also an essential factor in determining the economic growth of a country. A larger labor force means more people are available to produce goods and services, which can lead to an increase in economic output. On the other hand, a shrinking labor force can lead to a decrease in economic output.