The Unemployment Rate: Behind the Numbers
In September, the unemployment rate (UR) fell to 4.8% from 5.2%. Good news, right? Not so fast. As has been the case throughout much of the pandemic, economic statistics have been volatile and challenging to interpret. UR is calculated by taking the number of people unemployed / (unemployed + employed). Unemployed are defined as those who do not have a job but are actively seeking work. The UR is calculated from a household survey. Based on responses to a series of questions on work and job search activities, each person 16 years and older in a sample household is classified as employed, unemployed, or not in the labor force.
What comes next is a flood of statistics featured in the September 2021 report:
- The number of unemployed fell 710,000 to 7.7 million. Approximately 35% of these, or 2.7 million, are considered long-term unemployed – out of work for 27 weeks or more, while 15% are on temporary layoff.
- Over 10% (788,000) of the unemployed quit their job last month, which is a relatively typical monthly number, and close to the middle of the range observed over the last two years.
- 30% of the unemployed are “reentrants,” and only 6% are new entrants; between these two categories, there are 2.8 million who should be eager to work.
- To add insult to injury, away from the survey’s employed and unemployed statistics, there are 6 million people not in the labor force who “want a job,” 1.7 million of which are “marginally attached to the labor force” and did not search for a job in the past month.
Job Openings: Where Are All the Workers?
The September Job Openings and Labor Turnover Survey (JOLTS) report of quits registered a new high of 4.3 million. Job openings came in at 10.4 million. So, there are 10+ million jobs, and as noted above, 7.7 million unemployed people supposedly looking for work. Even if all those unemployed found jobs, there would still be nearly 3 million jobs available, which should be a promising statistic for job seekers, as the 20-year average is that there are about two times the number of unemployed as there are job openings.
So why are jobs so hard to fill? We’re not in a period of cyclical unemployment, where the economy can’t provide enough jobs for those who want to work. There is always some element of structural unemployment, which is defined as mismatched skill sets between the worker and the job. You can’t take an engineering job if you’re an accountant. There is certainly some of that now, with the growth in tech and more highly skilled jobs. Interestingly, the “lack of mobility” argument is less relevant with today’s remote work environment for many employed in these professions. No doubt we’ve seen some restaurant and health/childcare aides take jobs in a Walmart or Amazon distribution center where there are benefits, signing bonuses, and more safety from Covid. Then there is frictional unemployment, the period between jobs or while seeking a job, which has been extended during the pandemic. As previously mentioned, 4.3 million people left their jobs in August, but only 788,000 report themselves as “unemployed, job leavers” (the others have found new jobs or have dropped out of the labor force).
Frictional Unemployment: Dropping Out
Numerous reasons have been cited as the drivers of greater frictional unemployment and the resulting upside-down jobs/unemployed ratio. Understandably, the fear of going back to work and being exposed to Covid is an obvious one. 1.6 million people in the survey cited the pandemic. 900,000 mentioned family, childcare, or transportation; there are numerous stories of parents giving-up jobs due to their kids’ remote-learning setups. Thousands of childcare centers have closed or increased prices, and some parents just don’t want to risk sending their unvaccinated kids there. Also, with increased savings due to a lack of spending during the pandemic, especially with supportive government stimulus programs, many would-be workers remain on the sidelines, either defining themselves as looking for work, or not in the labor force anymore.
The Labor Force Participation Rate (LFPR), which reflects the number of people working or looking for work as a percent of the population, has been topical, though little changed at 61.6% in September and not far from its level in mid-2020. LFPR doesn’t seem to be driving the mismatch, though given that the participation rate is 1.7 percentage points lower than in February 2020, there may be some longer-term implications for employment, income, and productivity.
Even with a somewhat stable LFPR, many have dropped out of the labor force. During the pandemic, retirements have exceeded expectations by more than 2 million people. Unfortunately, opioid use also has taken its toll. A 2018 study by the Cleveland Fed estimated opioid prescriptions account for 44% of the realized decline in the prime-age male participation rate and 17% for prime-age women. Additionally, over the next 10 years, Millennials and Gen Xers may inherit an enormous amount of wealth – approximately $68 trillion. This may lead some to travel, study, or at least not work, especially in a difficult pandemic environment.
Conclusion: Amplifying the Noise
The pandemic has changed most of our daily routines, leisure-time activities, and work statuses. The resulting effect on the labor market has been significant, with potential longer-term impacts. In the near term, we expect noisy data, which will make monitoring wage pressures and their impacts on jobs, inflation, company margins, and credit spreads even more important.
Sources: Federal Reserve Bank of Cleveland; Bureau of Labor Statistics as of 9/30/21. The views contained in this report are those of IR+M and are based on information obtained by IR+M from sources that are believed to be reliable. This report is for informational purposes only and is not intended to provide specific advice, recommendations for, or projected returns of any particular IR+M product. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission from Income Research & Management.