How Low Can Unemployment Really Go?

Posted on November 8, 2019 at 2:24 PM PDT by

The mainstream media often reports on “the jobless rate” or “unemployment numbers,” information which can seem to impart something important and vital.

The latest number is from the Bureau of Labor Statistics, a government agency which tracks unemployment, is 3.5%.

But what does that mean?

Nominally, it means that of 100 people who are looking for work, a little more than three of them are not working. They want jobs but can’t get them.

To understand that, you have to understand what’s called the labor participation rate. This is the percentage of Americans who are trying to be employed at all.

Obviously, this number won’t include minors and the elderly. Some number of people are precluded from seeking work due to disability,

Many more are simply retired or they do not need work income for some reason. They are dependent on others who work or have enough money not to need work.

What’s left is the labor participation rate. Currently, that’s 63% of the population. That might seem low, but the most recent peak for this figure was 67% in 2000, at the height of the dot-com boom.

Another key point is that the employment numbers is based on the “non-farm payroll employment” data. That is, it’s people who get a regular check from any job that’s not in agriculture, which tends to be seasonal, and informal laborers who are not on a payroll.

Job hunt

Is 3.5% a low number? A lot depends on the labor participation rate from month to month. As the economy strengthens, people who previously were not seeking jobs (and thus not counted) join the hunt for work.

That can mean that the unemployment rate goes up, even if the number of jobs is the same. Likewise, if the economy cools some number of people stop looking for work, they no longer get counted as unemployed.

In that case, the unemployment rate could go down while the number of jobs is unchanged.

In addition, there’s what economists call the “structural mismatch” in the employment arena. Maybe tens of thousands are seeking work but they don’t have enough education or training to apply for what’s out there.

Taking into account all these factors, economists long considered 5% to be the functional equivalent of full employment. Anything below that could be chalked up to unqualified labor or “noise” in the data.

Economists care because very low unemployment can be a signal that inflation is imminent. Tight labor conditions can lead to rising wages, then rising spending, thus inflation.

Since the Great Recession of a few years back, these floor seems to have imploded. Unemployment has been much lower and inflation is very low just the same.

Still, as millions of baby boomers retire and millennials work to meet the expectations of whole industries that didn’t exist a decade ago, there is likely to be many twists and turns in the data to come.

MarketRiders, Inc. is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.