Labor Market Improves…But Not So Fast

Following up on the article I posted just a few days ago, I want to take another look at the unemployment rate as a measure of health for the labor market. The jobs report was better than expected this week, with payrolls increasing by over 900K and the unemployment rate dropping to 6%. Both were better than analyst forecasts. The data suggests the labor force is on the mend from a disastrous 2020 that included the steepest and fastest decline in employment in US history. With the unemployment rate back down to 6% from a high of 14.8% at the end of April 2020, we are back to the level of unemployment observed in September 2014. For reference, it took another 3.5 years for the unemployment rate to drop to 4%.

At the time, the participation rate was 62.8% compared to the current 61.5%. That slight difference in participation is another indicator that the labor market is not as healthy as it might seem on the surface. The participation rate is the number of people employed and unemployed but looking for a job. If someone has stopped looking for a job, they are not counted in the labor force as either of the two – in other words, they don’t exist in the data. However, once someone starts looking for a job, then it’s very likely they would start off being counted as unemployed but looking.

That means that if we add the required number of people to the labor force and concurrently add them to the unemployed bucket, even though both metrics would increase, the level of unemployment would increase as well. Let’s do the math:

Current Civilian Population: 261M

Current Labor Force: 160.6M

Current Unemployed: 9.7M

Calculated Labor Force @ 62.8%: 163.9M

Calculated additional participants and Unemployed Persons : 3.3M – added to both labor force and unemployed

New Unemployment Rate: 8% (13M Unemployed/163.9M labor force)

That’s 2% points greater than the reported unemployment rate. We should not forget the U6 Unemployment rate either, which stands at 10.7%. That is the unemployment rate that measures the number of people currently employed part-time only for economic reasons. In other words, they want full-time jobs but have only been able to find part-time jobs. These folks are included as employed in the headline U3 figure even though they are still technically looking for full-time work. There is no doubt the labor market is recovering, but let’s not get too excited just yet.

Labor Market