Monday, 24 of September of 2018

Economics. Explained.  

Unemployment Rate

September 7, 2018

The unemployment rate was unchanged in August at 3.9% after having fallen 0.1% in July.    The labor force declined 469 thousand in August.  Employment fell  423 thousand.  As a result, the number of unemployed workers fell by 46 thousand but the unemployment rate was unchanged at 3.9% (actually 3.853% on an unrounded basis).  While employment used in calculating the unemployment rate fell 423 thousand, payroll employment increased by 201 thousand.  How can this be?  First, the two are figures are derived from separate data streams.  The payroll number is calculated from employment numbers reported by a large number of employers across all industries.  Employment for the unemployment rate calculation is derived from knocking on doors and asking people if they have a job.  It is known as the  household survey.  One conceptual difference is that the household survey includes people who are self-employed which would not be captured in the establishment survey. It could be that self-employed workers declined sharply in August.  The other reality is that there is just statistical noise between the two surveys.  The trend rate of growth is similar, but with wide variation from month to month — the household survey being the more volatile of the two.

Labor force growth in the past year was 0.7% which is slightly less than growth in the population which was 1.1%.  Thus, the labor force partition rate fell slightly during that period of time.  It is now 62.7%.  A year ago it was also 62.9%.

At 3.9% the unemployment rate is far below the low end of the 4.5-5.0% level that the Fed considers to be full employment.  However,  the official rate can be misleading because it does not include “underemployed” workers which is true.  There are two types of “underemployed” workers.  First, there are people who have unsuccessfully sought employment for so long that they have given up looking for a job.  Second, are those workers  that currently have a part time position but indicate that they would like full time employment.  The total of these two types of underemployed workers are  “marginally attached” to the labor force.  The number of marginally attached workers has been falling quite steadily and is now roughly in line with where it was going into the recession.

We should probably be focusing more on the broadest measure of unemployment because it includes these underemployed individuals.  The broad rate fell 0.1% in August to 7.4% after having declined 0.3% in July.  At 7.4% it is lower than where it was going into the recession.  It is hard to argue that there is slack remaining in the labor market.  The broad rate of  7.4% compares to 3.9% for the official rate.

As the economy continues to expand the pace of hiring will remain steady and  both rates are going to fall.  As firms look a bit harder to find the workers they need they may have to turn to other sectors of the labor market rather than just currently unemployed workers.  They may seek younger workers, but they may have a difficult time because our youth unemployment rate is the lowest it has been in more than 20 years.

They may also look at some of their part-time workers who are reliable and have a good work ethic and offer them full-time positions.  Employers may have a bit more success here.  The number of part time workers who say they want full time employment is still slightly higher than it was going into the recession, although it is steadily declining and getting very close.

In short, both rates should continue to fall in the months ahead and are already below their full-employment threshold.  In that world labor shortages are likely to become even more evident in the months ahead.  That will put upward pressure on wage rates which should, in turn, gradually lift the inflation rate.  As a result, the Fed will continue to gradually raise the funds rate in the months ahead.

Stephen Slifer


Charleston, SC

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