In last week’s Market Commentary, we said that we were not surprised that the Fed had decided to forego the taper because its own conditions for doing so had not been met. The Fed’s dual mandate calls for the central bank to promote maximum employment as well as price stability. While we do not believe the Fed is satisfied with the progress on either objective, this week we focus on employment levels.
We at Farr, Miller & Washington have argued that the steady improvement in the official unemployment rate to today’s level of 7.3% from the high of 10.0% in October, 2009, is not a true reflection of labor market conditions. Fed Chairman Bernanke agreed with this assessment in July when he said that the unemployment rate (7.6% at the time) “overstates the health of the labor markets.” In order to shed a little light on the topic, we wanted to discuss two factors that are driving the unemployment rate lower but do not necessarily bode well for the long-term health of the economy. These two factors are the decline in labor force participation and the increase in people employed part-time for economic reasons.
Over the past several years, millions of people have left the labor force. This means that they neither have a job nor have sought a job in the past four weeks. There are many reasons why people are leaving the labor force, including demographic shifts like an increase in the number of older workers who are retiring. However, a certain percentage of those who have left the labor force have done so because they have been unable to find an acceptable job. When these folks drop out of the labor force out of frustration, they are no longer considered “unemployed” for purposes of computing the unemployment rate. Therefore, in a perverse way the lack of job opportunities has contributed to a decline in the unemployment rate.
Source: Bureau of Labor Statistics
The second factor to examine is the increase in people employed “part-time for economic reasons.” The Bureau of Labor Statistics defines these people as those who “worked 1 to 34 hours during the reference week for an economic reason such as slack work or unfavorable business conditions, inability to find full-time work, or seasonal declines in demand.” In other words, these are people who are working part-time but would rather have a full-time gig. The table below shows the enormous increase in these individuals. In fact, these individuals now total 7.9 million, or 5.1% of the Civilian Labor Force. Due to the fact that these people are considered to be both in the labor force and employed, this reduces the unemployment rate below where it would otherwise be.
To summarize, the official unemployment rate has declined by 2.7 percentage points since the high of 10.0% in October, 2009. While this is good news, it is not as good as it sounds. Much of the rate decrease has been the result of a sharp increase in part-time jobs or due to people leaving the labor force altogether. Economists will disagree as to how much of the decline was due to these trends, but we can all agree that the labor market is not as strong as the official rate would suggest. Moreover, we hope it now makes a little more sense why the Fed decided to hold off on the taper (for now). The Fed obviously understands these trends, and they also worry about the quality of the new jobs being added (low-wage, service-related jobs). The economy will not be on a path to self-sustaining recovery until we are able to add high-quality, full-time jobs that draw people back into the labor force. Until then, it might make sense to expect more of the same from the Fed. And finally, I would point out as an aside that with the overall US population growing, a smaller portion of workers who produce goods and services, earn wages, and pay taxes is like an obese person continuing to gain weight and standing on ever smaller legs. Neither the math nor the physics work long-term.