The Correct State Of The U.S. Labor Market - Look At Participation Rate

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by: Hedged Equity

Summary

The significance of economic growth to the declining unemployment appears to have diminished in the last 5 years.

In 2016, a total of 2.16 million jobs were created – the lowest number recorded in nearly five years. Despite the economy creating relatively fewer jobs, unemployment sustained its decline.

The prolonged inability of the economy to provide jobs have led people out of the labor force and despite recession 'theoretically' ending, job creation has not sufficiently caught up.

AN ANALYSIS OF THE U.S. LABOR MARKET

The U.S. labor market exhibited some major upswings and downturns since the financial crisis of 2008. At the onset of the recession, the nation's unemployment rate immediately jumped by 25.63% year-on-year followed by an even faster acceleration of 60% in 2009. The losses in business activity immediately resulted to job losses and at its worst, left 10% of the labor force unemployed. The government, unable to resort to fiscal policy, launched a series of monetary policies that helped reverse the recession. Aided by interest rate cuts and a series of quantitative easing, the U.S. economy inched up to end the deepest recession it has seen in modern history. As the economy slowly recovers, so did unemployment. Shortly after reaching its peak, unemployment rate started to decline at an average rate of 9% year-on-year.

While the nation's unemployment rate has been largely caused by the most recent recession, the significance of economic growth to the declining unemployment appears to have diminished for the last five years. A basic linear analysis of the data reveals an insignificant 0.25% decrease in unemployment as a result of a percentage point rise in economic growth. Despite sustained efforts from the government to keep the economy afloat, the current recovery lacks momentum. The economy repeatedly failed to take off as it moderately pulled back for every year of acceleration. But while economic growth lacks momentum, unemployment has sustained its descent. For the first time since the crisis, the economy is near full employment (4.9%) despite a noted slowdown in 2016.

The recent movement in economic growth and unemployment rate poses a question as to the cause of declining unemployment rate. Jobless growth is a common occurrence, especially at the onset of a recovery. However, job creation without growth is an anomaly. Beyond the falling unemployment data is the fact that the economy did not actually create more jobs. In 2016, a total of 2.16 million jobs were created - the lowest number recorded in nearly five years. Despite the economy creating relatively fewer jobs, unemployment sustained its decline. The question therefore remains, if the economy is weak and not creating sufficient jobs, why is the U.S. nearing full employment?

A look at the nation's labor force participation rate reveals a deeper issue in the labor market that is not evident in the unemployment data. From a high of 66% prior to the crisis, the current labor force participation fell with unemployment to a record low of 62.8%. Even as recession ended in 2010, the nation's labor force participation rate kept on dropping. This suggests that the recent improvement in unemployment rate is a result of people leaving the labor force rather than the economy's ability to create jobs. This also supports earlier findings regarding the diminished significance of growth to unemployment. The prolonged inability of the economy to provide jobs have led people out of the labor force and despite ending the recession, job creation has not sufficiently caught up to encourage people back to the labor market. Recent pattern suggests a more subdued movement in the labor force participation rate but remains at its lowest in four decades.

But the inability of the economy to create sufficient jobs is just one of the many issues plaguing the U.S. labor market. Unemployment by race suggests a deep seated problem that dates beyond the financial crisis of 2008. Even prior to the crisis, the unemployment rate of African Americans have been consistently above the national average and the highest among the different races. This is aggravated by the fact that they also have the lowest participation rate. Beginning 2008, the already high unemployment rate rose from 10.1% to 16% in 2010. As the national average started to decline, so did the unemployment rate among African Americans. However, the double digit unemployment rate lingered until 2014. In 2016, the average unemployment rate fell to its pre-crisis level of 8.4%. While it exhibited the same downtrend evident in the national rate, the high unemployment rate among African-Americans signifies an embedded socio-cultural issue that has been so far left unchecked.

Youth unemployment is also increasingly becoming a concern in the U.S. labor market. At the height of the crisis, youth unemployment reached a high point of 20%. Similar to the national average, it has declined as the economy recovers but remains at its double digit rate (12%) in 2016. It is important to note that around 80% of the unemployed youth are either new entrants or reentrants to the labor market. As such, the inability of the economy to create sufficient jobs will further put the inexperienced youth at a disadvantage potentially keeping the labor force participation at its low rate.

There have been small victories in the labor market through the years. Just as the economy failed to take off significantly, the downtrend in unemployment rate will always be marred by the deterioration in the labor force participation rate. As U.S. welcomes 2017, the nation welcomes a Trump presidency. The president-elect focused on labor issues during the campaign, including the inefficiency of the economy to create more jobs. The president campaigned against corporate inversion which has, in over a decade, created a vacuum in the labor market. Economic policies are about to change if not challenged and the controversial surge in fiscal spending that he promised can help improve both the labor market and the economy at the expense of a worsening fiscal condition. With most economic policies requiring legislation from Congress, the labor market is expected to continue with its current trend. Unemployment rate will play within the 4.5% to 5% range as the labor force participation rate reaches a plateau and youth unemployment is not likely to go down to single digit rates immediately this year.

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