Weak Links in the U.S. Labor Market

With Labor Day on the Monday following the release of the August 2017 U.S. employment report, this seems like a good time to evaluate the U.S. labor market.

According to the National Bureau of Economic Research, the Great Recession started almost 10 years ago in December 2007, and it lasted until June 2009. There have been tremendous improvements in the labor market since peak U.S. unemployment rates seen in the months just after the Great Recession ended.

Despite lower unemployment rates, the U.S. labor market still does not seem to be firing on all cylinders. There are several reasons why.

The Unemployment Rate

One of the most positive developments in the U.S. labor market in recent years has been the steady decline in the unemployment rate. The unemployment rate has fallen since a peak of 10.0 percent in October 2009 to recent lows of 4.3 percent. In fact, while the unemployment rate rose modestly in August 2017 to 4.4 percent, the 4.3 percent level seen in May and July 2017 is lower than any unemployment rate since May 2001.

And yet, the U.S. labor market does not feel hot.

Wage Inflation

One of the main reasons the U.S. labor market does not feel hot, is because wages have seen only modest increases. In recent months, wage inflation has been around 2.5 percent year over year. This is a significantly lower level of wage inflation than the rates seen before – and even during – the Great Recession.

Relatively low increases in the year-over-year pace of hourly earnings have helped keep inflation at bay, allowing the Fed to pursue a policy of gradual monetary accommodation removal. But, low increases in wages have also kept a big swath of the labor force from feeling significant benefits from the economic recovery and persistent growth that has typified the current business cycle.

Wages have not risen due to two factors: underemployment and labor force participation rates.

Underemployment

There are several different definitions of underemployment. One definition uses marginally attached workers plus workers who are part-time for economic reasons. These two categories of workers are considered underemployed, because they want full-time jobs, but cannot get them.

They are not considered underemployed because they are not working at the top of their education and skill set. This is a more fundamental definition of underemployed.

When we add the percentage of unemployed workers to the percentage of underemployed workers, the total is referred to as the U6 Rate. This rate spiked up to 17.1 percent in late 2009 and early 2010. This combined rate of unemployment and underemployment has also fallen sharply during the current business cycle.

We see in the graph below that the August 2017 U6 rate of 8.6 percent is still above the lowest percentages of the last business cycle before the Great Recession, when it fell to a low of 7.9 percent in December 2006.

Additionally, while the unemployment rate has recently been at the lowest levels since May 2001, the current combined unemployment and underemployment rates have been well above the lowest U6 rates seen in 2000 and 2001, when they fell to a low of 6.9 percent in October 2000.

Labor Force Participation

In addition to higher levels of combined underemployment and unemployment, the U.S. labor market also suffers from a relatively low level of labor force participation.

Labor force participation is a measure of the people who hold jobs (and who are employed), as well as the people who want jobs (but are unemployed). The labor force participation rate represents the percent of people in the U.S. economy who participate in the labor force, out of the 255.4 million non-institutionalized civilians over the age of 16 who could participate.

The number of people who hold jobs in the United States is 153.4 million, and the number of people who want jobs (but are unemployed) is 7.1 million. The total number of people participating in the labor force - who hold jobs and who want jobs - round up to 160.6 million.

When we divide the 160.6 million participants by the 255.4 million eligible people in the civilian population, we get the labor force participation rate, which was 62.9 percent in August 2017. So how low is the current labor force participation rate, compared to historical levels?

The current labor force participation rate is at the lowest level in almost 40 years!

The average level of labor force participation in 2016 was 62.8 percent – the lowest annual rate since 1977. In recent months, there has been a modest increase, but with a labor force participation rate of only 62.9 percent in August 2017, the rate is still at multi-decade lows. 

Participation Rates for Workers 55 Years and Older

Are older workers to blame for low overall labor force participation rates? In short: No.

The low rate of overall labor force participation has often been attributed to retirees, but the labor force participation rate for workers "55 Years and Over" rose after the Great Recession to levels not seen since the 1960s. In August 2017, this labor force participation rate was 40.2 percent, which is somewhat lower than recent highs seen in 2012, but which is still elevated, compared to levels seen in the previous five decades.

Participation Rates for Prime-Aged Workers (25 to 54 Years)

The labor force participation rate of prime-aged workers between the ages of 25 and 54 is near lows not seen in decades. Although this rate has risen since 2015 lows, it is still near the lowest levels since 1985.

Based on the high labor force participation rates for workers over age 55, total U.S. labor force participation rates are not low because older workers are dropping out. Overall U.S. labor force participation rates are low, because prime-aged workers are not participating as they have in the last 30 years. Plus, labor force participation rates are even worse for younger workers!

Participation Rates for Workers Aged 20 to 24

Workers between the ages of 20 and 24 saw their labor force participation rates fall in the period after the Great Recession to levels not seen since the early 1970s. In 2016, the annual labor force participation rate for workers aged 20 to 24 was 70.5 percent, which was the lowest annual rate since 1971.

These workers have suffered low labor force participation rates, which have risen modestly in recent months. In August 2017, the labor force participation rate for workers aged 20 to 24 was still only 71.6 percent, which is one of the lowest rates since the early 1970s.

Participation Rates for Workers Aged 16 to 19

While prime-aged and college-aged workers have seen declines in their labor force participation rates, high school-aged workers (between the ages of 16 and 19) have seen their labor force participation rates fall to the lowest levels in history, following the Great Recession. In August 2017, this labor force participation rate was very low at 35.2 percent, although this rate has risen since all-time low levels were recorded in 2015.

Although some argue that younger workers are not participating in the labor market, because education has become a more critical requirement for professional success, it may also be the case that older workers have crowded out younger workers.

Implications

Although the total U.S. labor force participation rate has risen modestly in recent months, it remains stubbornly low -- near the lowest levels in almost 40 years. Plus, younger workers are having a tough time entering the labor force to get relevant and valuable experience.

Given these labor force dynamics, as well as the still elevated U6 unemployment and underemployment rate, it is easy to see how there is some slack left in the U.S. labor market – and why wages have been slow to rise.

Younger workers are having a tough time entering the workforce and gaining work experience, which could limit younger American workers’ mobility – in terms of geography, class, and income.

What Have You Seen?

Have you seen these kinds of issues in your local labor market?

Have you seen weak wage growth, even though the local job market appears to be strong?

Do you see older workers staying in the labor market longer, while younger workers cannot break into the labor market?

- Jason Schenker

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Tags: #AmericanMobility #jobs #workforce #economy #unemployment #inflation #Fed #FOMC #LinkedInLearning #futureofwork

Jason Schenker is ranked the world's leading financial market futurist, and he is a columnist for Bloomberg Prophets. Jason Schenker is the President of Prestige Economics and the Chairman of The Futurist Institute. 

Jason is also a LinkedIn Learning instructor for a forthcoming course on Financial Risk Management, which will be released in the fall of 2017.