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Commentaries

PMC Weekly Review - August 7, 2015

A Macro View - Peeling Back the Layers of the U.S. Employment Situation

July’s unemployment numbers came in today at 215,000 which was slightly below estimates (223,000) and the unemployment rate remained unchanged at 5.3%. That said, economists have raised concerns if the unemployment numbers truly reflect the employment situation in America. The argument is that the numbers do not account for the underemployed or those that have dropped out of the labor force.

In order to account for these two factors, economists typically analyze a couple other pertinent statistics. One statistic they will be looking at is the unemployment rate plus underemployment rate, which includes those workers who work part-time yet wish to be full-time or are skilled laborers working unskilled jobs (this rate dropped from 10.4% to 10.3%).

In addition, the labor force participation rate factors into a deeper evaluation of the employment situation. That is, how many Americans are in the work force or looking to join the work force. A decline in this rate accounts for those who have dropped out of the workforce all together. Combining all these metrics shows a more complete picture regarding the state of employment within the United States. While it seems the overall employment situation in the U.S. has improved according to the unemployment numbers released today, it does not paint as rosy of a picture as one would believe.

If we look at the labor force participation rate, on the surface the unemployment story is not as positive as a 5.3% unemployment rate appears. Since the recession of 2002 until the credit crisis of 2008, this rate averaged around 66% with little volatility; meaning 66% of the adult population in the U.S. was either employed or participating in the work force. Since that time, the number has declined steadily to 62.6% meaning over 3% of the U.S. population stopped working and is looking for employment. Of that 3%, roughly half of those workers appear to be baby boomers who are retiring early but that still leaves about 1.5% of Americans who have dropped out of the work force. This number is concerning as it becomes harder for the long term unemployed to re-enter the work force which will impact these Americans for years to come and also reduce their ability to contribute to the overall economy. In addition, given the low amount of retirement savings for baby boomers, there is concern that those retiring early will be less likely to have the means to support themselves during their entire retirement.

The other unemployment rate economists are closely following is the unemployed plus underemployed. This rate has come down considerably in recent periods, though it continues to remain elevated when compared to pre-credit crisis levels. In particular, the current unemployed plus underemployed rate sits at 10.3% versus a rate of 8.3% in June of 2007. Meanwhile the unemployment rate, currently at 5.3%, is nearing the 4.6% rate observed in June of 2007. A higher percentage of underemployed workers is concerning as these workers tend to fall behind in both pay and advancement opportunities and ultimately reduces their ability to contribute to the overall economy. Though the rate remains elevated, one positive is that the trend line has declined almost 40% from the peak levels in 2009.

Finally, when looking at all three unemployment statistics, these numbers are important indicators because they capture a segment of the U.S. population who are increasingly being left behind. Given the U.S. economy is primarily driven by personal consumption, consumers dropping out of the workforce or who are underemployed have a real economic impacts in addition to the negative social consequences. While our unemployment rates appear stronger than the majority of the developed world, the reduced labor participation and underemployment rates are concerning as they continue to represent a headwind for future economic growth. It is important that investors realize the employment picture being painted might not be as rosy as it seems and to keep an eye on the entire employment situation in the U.S.

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