A New Indicator for Unemployment

By Kevin Chambers

The BLS announced earlier this month that the unemployment rate in the US dropped to 3.9%. This is the lowest rate since the Clinton administration. One would think that

news about lower unemployment should be a good thing, right? A sign of a better economy. As backward as it seems, the announcement of more people getting jobs has actually worried investors. They worry that despite the increasing number of people getting jobs, we have not seen a requisite increase in wages. People have been getting paid the same, even as the labor market tightens. The theory states, that as more and more people get jobs. Employers have to compete to get good workers. The easiest way to convince someone to move jobs? Pay them more. Some analysts are worried that inflationary pressure is building in the market, and when wages do rise, it could spur more inflation. This fear of inflation is one of the reasons the stock market and bond markets have struggled early 2018.

Job Market Basics:

The job market, or labor market, is the ethereal place where employers try to find employees. It is obviously not a physical marketplace, like for stocks or fish, but refers to the entire economy and the ability of people to find jobs. The most well-known data point concerning the labor market is unemployment. Unemployment is a straightforward calculation. It is the percentage of people looking for work that are not employed. From theory, the unemployment rate can never be zero. There are a few different types of unemployment, so to start off, we will go over some of the basic definitions.

Frictional Unemployment:

Frictional unemployment is unemployment caused by the time it takes people to find jobs. As new graduates or former stay-at-home spouses enter the job market, they are looking for work, but not employed. It also catches people that get laid off or quit and are looking for their next job. The internet and ease of employers and employees to communicate have lessened the effect of frictional unemployment on the overall rate, but it is still a factor.

Structural Unemployment:

Structural unemployment refers to a difficulty of employers to find qualified workers. This unemployment is harder to measure and is created by an increase in technology or an economic shift. With the current rise in technology and the lack of training in the US workforce, this has been an important factor in the past 20 years. Structural unemployment usually affects rural areas more than urban.

Natural Rate:

The natural rate of unemployment is the amount of unemployment attributable to both frictional and structural. There is no set level for the natural rate, and it is a topic of much debate for economists and policymakers. The natural rate is the lowest level of unemployment that can be reached in an economy and is the reason unemployment can never reach zero.

Deficient Job Market:

When there is unemployment that is beyond the natural rate, the job market is considered deficient. In other words, there are not enough jobs in the economy to support the number of people that want them. This is the state of the market during a recession or downturn. When the deficient market level is zero, economists consider the market at “full employment.”

Major Data Points

Civilian Unemployment:

This is the most commonly reported unemployment number. It represents the number of unemployed as a percentage of the labor force. Labor force data are restricted to people 16 years of age and older, who currently reside in 1 of the 50 states or the District of Columbia, who do not reside in institutions (e.g., penal and mental facilities, homes for the aged), and who are not on active duty in the Armed Force.[1]

Non-Farm Payrolls:

This is probably the most common data point, along with unemployment, that is reported and watched. Total Non-Farm Payroll is a measure of the number of U.S. workers in the economy that excludes proprietors, private household employees, unpaid volunteers, farm employees, and the unincorporated self-employed. This measure accounts for approximately 80 percent of the workers who contribute to Gross Domestic Product (GDP). 

Wages:

There are a lot of data points that try to set a level of wages in the United States. Two common numbers that are used are “median usual weekly real earnings” and the “total compensation rate.” The median wage is the weekly earnings of wage and salary workers. Wage and salary workers are workers who receive wages, salaries, commissions, tips, payment in kind, or piece rates. The group includes employees in both the private and public sectors but, for the purposes of the earnings series, it excludes all self-employed persons. It is adjusted for inflation and is reported in 1982-84 dollars. The total compensation rate is the 12-month trailing percent change in compensation of all civilian workers. 

Recent History: 

It will be no surprise to anyone that the biggest event in recent history for the labor market was the 2008 crisis. Most of the major indicators took a hit in the years following 2007-2008. Unemployment peaked at 10%, job openings fell to 1.7%, wages fell to $330 a week, over 8.5 million jobs were lost, and wage growth stagnated. The recession was very difficult for many people, especially those at the lower end of the wage spectrum (Lowery, 2013).

Now with record low unemployment, we would assume that our economy has recovered. However, I would like to point you toward a new data point that will give us a little more insight into what is happening now: The Working Age Employment Rate. This data point is explained by Jordan Weissmann of Slate:

‘I’ve dubbed [it][2] the working-age employment rate, because it just tells you the percentage of Americans between the ages of 25 to 54 who have a job. In other words, it tells you what share of Americans you’d expect to be working are actually gainfully employed.’

Looking at the graph of the working-age employment rate, you can see plainly that our labor market has not recovered from the recession. We are adding jobs, but there might be more slack in the labor market, as people who have never had jobs because they have stayed in school as the economy recovered, or those people that left the labor market and are returning. A lower percentage of individuals are currently working than before the crash in 2008. So even with record low unemployment numbers, we still might not see wage growth.

The Federal Reserve has teams of economists looking at these numbers. Even though interest rates have started to rise, and inflation fears have been leaking into the financial press, the Fed has been dovish on rising rates higher. The inflation hawks are pointing to the headline unemployment number as an indicator. Hopefully, decision-makers at the Fed are considering all of this.

Our accounts have safeguards for multiple market scenarios. Investments that will provide downside protection in inflationary periods, and in rising interest rate environments. We are not in the business to try and predict market events but like to build diversified all weather portfolios.