US labor force participation falls to lowest non-Covid level since 1976

The U.S. unemployment rate fell to 4.2% in June, its lowest level in a year, but Bureau of Labor Statistics data released Thursday showed the decline was driven largely by people leaving the labor force. The labor force participation rate dropped to 61.5%, the weakest reading since March 2021 and, excluding the Covid-era labor market, the lowest since June 1976.

The participation rate measures the share of the working-age population that is either employed or actively looking for work. Because the unemployment rate counts only people in the labor force, it can fall when job seekers stop searching, even if the number of people working also declines.

The BLS household survey showed the labor force fell by 720,000 in June. The number of people outside the labor force rose by 832,000, while household employment declined by 507,000. A separate BLS establishment survey, which counts jobs on employer payrolls rather than individuals, showed payrolls rose by 57,000 during the month.

Mike Reid, head of U.S. economics at RBC, described the move as a large withdrawal from the workforce and said several explanations may be involved. In a post-report note, Reid wrote that the jobless rate declined as both unemployment and the labor force contracted, adding that retirements may be part of the story but that some former job seekers may also have stopped looking.

Labor supply weakens despite lower jobless rate

Over the past year, the labor force has fallen by slightly more than 1 million, according to the BLS figures cited in the report. The number of employed people has dropped by 1.06 million, while the number of unemployed people has risen by 40,000. Over that same period, the unemployment rate increased by only one-tenth of a percentage point to 4.2%.

The employment-to-population ratio, another gauge watched by economists because it compares employment with the broader population rather than only active labor-market participants, slipped to 59% in June. That was the lowest reading since October 2021, according to the BLS data.

Dan North, senior economist for North America at Allianz, said the participation rate was the more significant signal in the June data. North said the one-month fall was large and that the decline over the past year also stood out.

Prime-age workers drove the June decline

Lower participation is often linked to demographics, including retirements among older workers, and to changes in the immigrant workforce. The June figures showed the sharpest decline among prime-age workers, defined as people aged 25 to 54.

The prime-age participation rate fell 0.6 percentage point to 83.3%, its lowest level since December 2023, according to the data. North said the latest figures weakened the case that retirements and immigration shifts alone explain the drop.

Some economists cautioned that the June data may be volatile. They pointed in particular to the large decline in leisure and hospitality employment as a possible sign of statistical noise. Even so, the participation figures add to a broader softening in labor-supply measures.

Heather Long, chief economist at Navy Federal Credit Union, wrote that it was notable to see 720,000 people leave the search for work and the hospitality sector lose jobs. She said the labor market remained better than a year earlier, while available opportunities were limited.

This story draws on original reporting from CNBC Economy.