Monday, 25 of March of 2019

Economics. Explained.  

Unemployment Rate

March 8, 2019

The unemployment rate fell 0.2% in February to 3.8% after having risen 0.1% in January and 0.2% in December.   The November level of 3.7% was the lowest level for the unemployment rate in 48 years.  The labor force fell 45 thousand in February.  Employment rose 256 thousand in February.  As a result, the number of unemployed workers declined 300 thousand in February.  Thus, the unemployment rate fell 0,3% to 3.8%.  While employment used in calculating the unemployment rate rose 256 thousand, payroll employment increased by just 20 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 rose sharply in February.  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 0.8% which is slightly faster than growth in the population which was 0.6%.  Thus, the labor force participation rate rose during that period of time.  It is now 63.2%.  A year ago it was 63.0%.  Also note that the labor force rose 1.6% in 2018 versus 0.6% in 2017.  It would appear that the relatively rapid pace of GDP growth last year attracted some previously unemployed workers into the labor force.

At 3.8% the unemployment rate is far below the 4.5% 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 risen somewhat in the past couple of months and is now slightly higher than  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 0.8% in February to 7.3% after having risen 0.5% in January.  At 7.3% 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  7.3% compares to 3.8% 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 48 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.  But the number of part time workers who say they want full time employment is roughly in line with where it was going into the recession.

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.  Thus far the increase in wages is being partially offset by gains in productivity such that “unit labor costs” or labor costs adjusted for the increase in productivity have risen just 1.0% in the past year.  Thus, the seemingly tight labor market is not generating any significant upward pressure on the inflation rate.

Stephen Slifer


Charleston, SC

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