The Labor Department reported last Friday that the official US unemployment rate fell to 3.9% in April, the lowest rate in 18 years, going back to 2000. That’s the good news. However, a closer look at the internals of the report are not as encouraging. Let’s investigate.
Friday’s jobs report for April found that the economy added 164,000 jobs last month. While not a bust, we’ve seen an average of 200,000 new jobs each month this year, partly due to the tax cuts which took effect in January.
The latest jobs report also found that wages rose slightly less than expected in April, with hourly earnings climbing at a 2.6% annualized rate, down from 2.7% in March. Economists continue to scratch their heads over why wages aren’t climbing faster in what appears to be an extremely tight labor market.
As you can see, wage growth fell sharply following the Great Recession and then remained stagnant at around 2% until 2016. While most economists predict that wage growth will accelerate this year, they’ve said that for the last several years now.
Here’s the question: Is the labor market really that tight? If we look at the rest of the jobs report, as well as historical jobs data, we find that the job market isn’t nearly as tight as it seems based only on the official unemployment number.
Keep in mind that the unemployment rate comes from a separate survey than the one used to count jobs created. The former is based on a monthly survey of 60,000 households by the Census Bureau. The latter is from a survey of about 150,000 businesses and government agencies by the Labor Department.
According to the Census Bureau household survey, the biggest contribution to the drop in the unemployment rate wasn’t people getting jobs – that survey registered a gain of just 3,000 jobs in April. It was due mainly to the fact that 410,000 people dropped out of the labor force in April and are no longer counted as unemployed. That’s mainly why the unemployment rate dropped to 3.9% from 4.1% in March.
If we compare the April numbers to December 2000, the picture is even more striking. The labor force participation rate in December 2000 was 67%. Today, it is just 62.8%, down from 62.9% in March The employment-to-population ratio in December 2000 was 64.4%. Now it’s 60.3%.
Americans not in the labor force – those working-age people who don’t have jobs and aren’t looking – has risen a stunning 25.3 million since late 2000. Think about it this way. If the labor force participation rate were the same today as it was in December 2000, the unemployment rate wouldn’t be 3.9%. It would be around 10%!
It’s true that many who’ve left the labor force over the past 18 years are Baby Boomers entering retirement. But that doesn’t come close to explaining the massive increase in labor market dropouts.
For example, the labor force participation rate among 20-24 year-olds was 78% in December 2000, whereas it’s just 71% today. In contrast, among those 55 and older, the participation rate increased – going from 33% in December 2000 to 40% now.
While that last statistic is encouraging, there are millions of potential workers who have dropped out of the labor force, given up looking for work and are sitting on the sidelines.
If businesses can’t find enough workers, they can’t satisfy all of the demand they’re seeing from customers. That means they’re not delivering as many products and services as they could, which translates into slower economic growth. And slower growth eventually means less hiring.
Finally, with the unemployment rate below 4%, this virtually guarantees that the Fed will hike short-term interest rates by another 0.25% at its June policy meeting, with a subsequent hike coming later this year.
There are many conclusions that can be drawn about today’s very unusual labor market, but two top the list. First, the drop to 3.9% in the unemployment rate, the lowest since 2000, is a terrific accomplishment. Most forecasters believe the jobless rate can go even lower later this year.
Second, however, millions of working-age Americans have dropped out of the labor market in the last decade, and that trend continued in April. Many get by on government assistance of one kind or another, which is a discussion for another time.
I’ll leave it there for today.
Please explore why the labor participation rate is so low. I think welfare and assistance needs to be revised for those able to work to crate a hand up not a hand out! Instead of a hard line where one loses benefits make it a phase out so for every $1 earned they lose $.25 . I know of qualified people who will only work until they reach the max without losing benefits!! Our system encourages low expectations.