uploads/2015/05/Unemployment-Rate-vs-Labor-force-Participation-Rate-2015-05-251.jpg

Why Restaurants Need to Cater to a Wider Demographic

By

Updated

US unemployment

The unemployment rate measures individuals who are unemployed, but who are actively looking and willing to work. It does not account for people who have left the labor force, known as missing workers. So, we use the labor force participation rate to get a complete picture.

The labor force participation rate includes civilians over 16 years of age who are either actively looking for a job or who are employed. The unemployment rate has decreased steadily since 2010.

Article continues below advertisement

Interpretation

The unemployment rate in April 2015 declined slightly to 5.4%, compared with 5.5% in March. There will always be some unemployment in the economy, but it can be challenging to determine an appropriate unemployment rate. In its recent summary of economic projections, the Federal Open Market Committee (or FOMC) participants expect the long-run unemployment rate to be in the range of 5.2%–5.5%.

A falling unemployment rate is not enough reason for investors to cheer. When we look at the labor force participation rate in the above chart, it too has been falling over a decade. On February 4, 2014, the Congressional Budget Office (or CBO) released a report titled The Slow Recovery of the Labor Market. According to this report, the participation rate is falling because the Baby Boomer generation is retiring. Other significant factors include the lower participation of men between 25–54 years of age, as well as the lower participation of men and women between 16–25 years of age.

Catering to a wider demographic

Reaching out to a wide demographic, including those who are unemployed and underemployed, is important for restaurant chains. Pricing the menu correctly is an important factor in appealing to those who are out of the labor force. This could explain why casual dining restaurants, which have a higher average check than fast food and fast casual restaurants, are not performing as well as their lower-priced counterparts.

A variety of national chains are part of the Consumer Discretionary SPDR ETF (XLY), which holds about 4% of McDonald’s (MCD), 3% of Starbucks (SBUX), 1.5% of Yum! Brands (YUM), and 0.3% of Darden Restaurants (DRI).

To learn more about these demographic factors, please read An in-depth overview of the US restaurant industry.

Advertisement

More From Market Realist