Great Resignation Explains the Cause of the decline of Unemployment Rates

‘Great Resignation’ is a new term describing an increase of employees’ resignations in 2021. However, unlike normal resignations, some of the resigned are not returning to the job markets. It results in a decline in the labor force participation rate, and contributes partially to the recent decline in the unemployment rates. It makes the interpretation of unemployment rates confusing as it does not imply that some of the unemployed are now employed, but just that they do not look for jobs at least for the time being.

Why is there such a wave of resignations? There can be different reasons for this. Some believe that the pandemic has made online work more feasible, which opens up new types of jobs or new startup paths, and it enables more people to choose not to work in traditional workplaces (For example, the following DW, 2021 youtube provides some details).

https://youtu.be/RR5XaparSAo

Labor force participation rate has fallen

Labor Force Participation Rate refers to the percentage of the working population who are employed and looking for jobs in the total population aged 15 and over (Equation 1). In the past, the labor force participation rate changed slowly, such as an aging population which has led to a gradual decrease in the labor force participation rate, etc. However, after the outbreak of the pandemic, the labor force participation rates in many countries have fallen substantially. Even after the pandemic has eased, the participation rates do not return to the pre-pandemic level, reflecting that some of the labor force has left the job markets after the outbreak of the pandemic.

It should be noted that ‘working population’ is defined to include both the employed and the unemployed, but it does not include those who leave the workplace, because the definition of the unemployed only refers to people who are, among others, looking for work in the past 30 days (Equation 2):

Equations 1 and 2-Labour force participation rate and unemployment rate

Figures 1, 2, and 3 show the labor force participation rates in the United States, the United Kingdom, and Hong Kong in the past five years. All three figures show a lower labor force participation rate by about 1% after the pandemic. The United States’ dropped from approximately 63.5% at the end of 2020 to 61.8% in November 2021, while the United Kingdom’s dropped from 79.8% to 78.8%. The labor force participation rate in Hong Kong also fell from 61% to about 59%.

Figure 1 The labor force participation rate in the United States. Source: Trading Economics
Figure 2 Labor force participation rate in the UK. Source: Trading Economics
Figure 3 Labor force participation rate in Hong Kong. Source: Trading Economics

Take Hong Kong as an example, a 1% fall in labor force participation rate represents more than 140,000 people left the job market and is excluded from the working population. According to the Census and Statistics Department (CSD, 2021)’s data, there was a 1.6% decrease of labor force participation rate from 2018 to 2020 representing a decrease of more than 90,000 people in the labor force. Up to November 2021, the working population is further reduced by more than 50,000 people. Bearing in mind that they are not unemployed but decide to leave the workplace for unknown reasons.

Figure 4 shows that at the beginning of the outbreak in 2020, the participation rate continued to decline. However, even after the pandemic has eased in Hong Kong in 2021, the labor force participation rate does not recover, but it continues to decline. It seems that many people have left the workplace after the outbreak of the pandemic.

Figure 4 Hong Kong’s labor force and participation rate, source: Census and Statistics Department (2021)

Unemployment rates seem to be improving

It cannot be emphasised more that the decline in the labor force participation rate does not necessarily mean an increase in the unemployed population. On the contrary, the unemployment rates in many countries have been improving in recent months as shown in Figure 5. Some of their unemployment rates have fallen to about the natural unemployment rate of 4% (Figure 5).

Figure 5 Unemployment rates in ten economies in the world, source: OECD data (2021), Hong Kong Census and Statistics Department (2021)

However, the decline of the unemployment rates does not necessarily mean that the number of employed people has increased. Just as the aforementioned trend of Great Resignation has revealed that people are leaving the workplaces without looking for jobs which renders a decrease in both the number of working population and the number of unemployed. Even if the number of employed people remains unchanged, the unemployment rate will fall.

Figure 6 shows an example. If the baseline case is that there were 90 employed, 10 unemployed and 50 people not in the working population. Then when five unemployed people leave the workforce, the unemployed population decreases by 50% (from 10 to 5), and the working population also decreases (from 100 to 95), but the rate is relatively smaller, only 5%. The unemployment rate falls (from 10% to 5.3%). Therefore, part of the reason for the recent improvement in the unemployment rate in various countries is the reduction of the working population due to the Great Resignation.

Figure 6 Examples of labor force participation rate and unemployment rate and population leaving the workforce.

The Great Resignation reveals the intricacies of interpreting unemployment rates. On the one hand, it is based on the interviewees’ verbal responses whether he/she was unemployed in the last 7 days and was looking for jobs in the past 30 days or not. In other words, the unemployment rate is determined by the respondent’s self-perceived aggressiveness or willingness to find jobs at the time. If he/she believes that he/she is not finding jobs in the past 30 days, then he/she will not be regarded as unemployed.

[a Youtube for this article: https://youtu.be/IkfAAqBdRl0]

References

CSD (2021) Table 7:Labor force and labor force participation rate by sex, Census and Statistics Department, Hong Kong SAR Government. https://www.censtatd.gov.hk/tc/web_table.html?id=7#

OECD (2021) Data — Unemployment Rate. https://data.oecd.org/unemp/unemployment-rate.htm

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