When you say "participation rate," I assume that you are
asking about participation in the labor force. If so, changes in the participation rate
are important because they can cause the official unemployment rates to be
misleading.
At times, unemployment rates can fall even
though fewer people are working. As people stop looking for work, they drop out of the
labor force. They are typically called "discouraged workers" and are not counted as
unemployed even though they do not have jobs. If this happens, the unemployment rate
will misstate the actual amount of change that is going on in the economy. The
unemployment rate might, for example, decrease even though no more people are working.
This would make it look like the economy is improving when it is
not.
In this way, changes in participation in the labor
force can mislead us about the actual impact of changes in the unemployment
rate.
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