June jobless rate fell as more Americans left the labor force

The June jobs report delivered a lower unemployment rate, but the improvement came from a softer place: fewer Americans were counted in the labor force. For everyday investors, that means the headline jobless rate looked better while the underlying participation data pointed to a cooling labor market, according to Bureau of Labor Statistics figures released Thursday.

The unemployment rate fell to 4.2%, its lowest level in a year, according to the BLS. That rate measures the share of people in the labor force who do not have a job and are actively looking for one. It can fall when more people get hired, or when people stop searching and are no longer counted as unemployed.

June’s report showed the second version. The labor force participation rate dropped to 61.5%, the lowest level since March 2021, according to the BLS data cited by CNBC. Leaving out the pandemic-era labor market, CNBC reported that the rate was the lowest since June 1976.

Why the participation rate matters

The labor force participation rate measures the share of the working-age population that is either employed or looking for work. A lower reading can signal retirements, demographic shifts, immigration changes or discouraged job seekers stepping away from the search.

Mike Reid, head of U.S. economics at RBC, wrote in a post-report note that the unemployment rate declined as both the number of unemployed workers and the overall labor force shrank. Reid said the move could reflect retirements, but could also show former job seekers leaving the labor force.

The scale of the monthly move stood out. The labor force fell by 720,000 people in June, according to the household survey from the BLS. The number of people classified as outside the labor force rose by 832,000.

The BLS report also showed a split between its two main surveys. The establishment survey, which tracks payroll jobs at employers, showed a gain of 57,000 jobs in June. The household survey, which tracks individuals’ employment status, showed the number of employed people fell by 507,000.

The weakness goes beyond retirees

Over the past year, the labor force has fallen by just over 1 million people, according to CNBC’s review of BLS data. The number of employed people declined by 1.06 million, while the number of unemployed people increased by 40,000. Over the same period, the unemployment rate rose only one-tenth of a percentage point to 4.2%.

The employment-to-population ratio, which measures the share of the population that is working, slipped to 59% in June. CNBC reported that was the lowest level since October 2021.

Dan North, senior economist for North America at Allianz, said the participation rate was more meaningful to him than the unemployment rate. He told CNBC the June drop was a large one-month decline and part of a notable move over the past year.

Some economists often point to retirements among older workers and changes in the immigrant population as reasons for lower participation, according to CNBC. June’s data complicated that explanation because the biggest decline came among prime-age workers, defined as those ages 25 to 54.

The prime-age participation rate fell 0.6 percentage point to 83.3%, its lowest level since December 2023, according to Federal Reserve Economic Data cited by CNBC. North said the retirement and immigration explanation fit the latest numbers less well and described the data as a reason for concern.

Some economists told CNBC the June figures may have been noisy, pointing to a large decline in leisure and hospitality employment. Heather Long, chief economist at Navy Federal Credit Union, wrote that it was striking to see 720,000 people stop looking for work and the hospitality sector lose jobs, while adding that the job market is better than a year ago but opportunities are limited.

This story draws on original reporting from CNBC.