Mike Kofi OkyereWritten by

The Employment Report 10/2015 – Labor Force Participation at Historic Low

Programmatic, Tracking & Optimization| Views: 25

Oh boy, last month the U.S. economy exceeded expectations.

The BLS October ’15 Report Outlines Key Developments:

  1. 271,000 new jobs have been added
  2. Hourly earnings went up 2.5% over the year
  3. The unemployment rate went down to 5.0% 
  4. Labor force participation is at 62.4%

Public reactions have been mainly positive but it is easy to be misled by certain indicators.

Economics: sounds complicated but it's not [source: Dilbert]
Economics: sounds complicated but it’s not [source: Dilbert]

Lets have a closer look at the numbers.


#1: Job Difference Confirms Seasonal Weakness of Previous Months

The much bigger than expected 271,000 surge in non-farm payrolls in October confirms that the weakness in August and September was just a temporary blip and, given the circumstances, a December interest rate hike would now appear to be the most likely outcome.

– Paul Ashworth, chief US economist at Capital Economics

The numbers in the BLS employment report suggest that the economy is strengthening.

Federal reserve chair Janet Yellen said there is a real possibility for the first interest rate increase since the 2008 recession.

The Fed is closely observing developments in the labor market and will decide on the interest rate increase on December 15th/16th.


#2: Tight Labor Market Drives Up Hourly Wages

Businesses are raising wages in response to the fact that it is tougher and tougher to find workers.

When I go out and talk to people, I ask them: ‘Are you having difficulty recruiting workers?’ I always have people raising their hands.

The labor market is tightening.

– Gus Faucher, senior macroeconomist at PNC

Wage increase: not an even increase across all job types [source: Dilbert]
Wage increase: not an even increase across all job types [source: Dilbert]

Amidst fights for minimum wage increases all industries have seen an aggregated hourly wage growth of 2.5% over the past year.

Economist Paul Ashworth also expects ‘strong wage growth and price inflation over the next year’, which most likely would result in a tighter fiscal policy than currently projected by the Federal Reserve.


#3: Unemployment Rate as a Misleading Indicator

At this pace, if sustained, which seems likely, the economy will be at full employment by next summer. Pressure on the Fed to begin normalizing interest rates is also mounting as full employment approaches.

– Mark Zandi, chief economist at Moody’s

Unemployment: people who are looking for a job ≠ people who are jobless
Unemployment: people who are looking for a job  all people who are jobless [source: Factor market comic // Peters]

In October unemployment (U-3// official unemployment number) went down to 7,908,000.

In addition underemployment (U-6) dropped from 10.0% to 9.8%.

Despite improvements these numbers from the employment report don’t show the full picture.

The biggest problem of the U-3 number is that it does not cover citizens who have completely dropped out of the labor force.


#4: Labor Force Participation at a Historic Low

The Federal Reserve should keep in mind the lackluster growth we’ve seen throughout 2015 and continue to let the economy recover.

They should not raise interest rates until wages rise further and for a sustained period of time, and people on the edges of the economy get jobs.

– Elise Gould, senior economist at EPI

At only 62.4% the labor force participation rate is the lowest since 1977.

Main Reasons:

  1. Aging U.S. Population – baby boomers retire at a growing rate
  2. Difficult Job Market – a big number of people is discouraged in participating in the labor market and have stopped looking for a job
  3. Disability – more people are applying for disability insurance

This means that 94,513,000 Americans are not in the labor force.

The most interesting lever in this group of people are the discouraged citizens, who might have the skills to participate in the labor market but have lost the desire.

Time will show if & how new methods of job search or opportunity allocation can tap into this underserved segment of U.S. citizens.


Bottomline:

  • Federal Reserve will most likely raise interest rates in December due to positive labor market developments
  • Despite improving unemployment numbers (5.0%) the participation rate (62.4%) is still at its lowest point in 38 years
Mike Kofi Okyere

About Mike Kofi Okyere

Mike Kofi Okyere was founder and CEO of Perengo (acquired by TMP Worldwide in 2019) and has enjoyed applying his years of experience in the world of e-commerce and Ad Tech to improving the world of recruitment through algorithms and machine learning. Previously, he served as the head of performance advertising for AdMob (SEA/AU NZ), before its acquisition by Google in 2010. At Google, he drove the strategy and execution for mobile display advertising as head of mobile advertising for Australia/New Zealand, and then head of mobile display advertising for Google Asia. Thereafter he worked in director of sales roles with both Criteo and Issuu before founding Perengo in 2015.

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