October 4, 2019

The unemployment rate fell 0.2% in September to 3.5% after having been steady at 3.7% in each of the previous three months.   At 3.5% the unemployment remains close to its lowest level since December 1969  — almost 50 years ago.  The labor force rose 117 thousand in September.  The economy created 391 thousand jobs.  As a result, the number of unemployed workers declined 275 thousand in September.  Thus, the unemployment rate fell 0.2% to 3.5%.  While employment used in calculating the unemployment rate rose 391 thousand, payroll employment increased by 136 thousand.  How can this be?  First, the two are figures are derived from separate data streams.  The payroll number is calculated from employment numbers reported by a large number of employers across all industries.  Employment for the unemployment rate calculation is derived from knocking on doors and asking people if they have a job.  It is known as the  household survey.  One conceptual difference is that the household survey includes people who are self-employed which would not be captured in the establishment survey. It could be that self-employed workers rose vigorously in September.  The other reality is that there is just statistical noise between the two surveys.  The trend rate of growth is similar, but with wide variation from month to month — the household survey being the more volatile of the two.

Labor force growth in the past year is now 1.2% which is slightly faster than growth in the population which was 0.5%.  Thus, the labor force participation rate rose slightly during that period of time.  It is now 63.2%.  A year ago it was 62.7%.  It would appear that the relatively rapid pace of GDP growth currently is attracting some previously unemployed workers into the labor force.

At 3.5% the unemployment rate is far below the 4.2% level that the Fed considers to be full employment.  However,  the official rate can be misleading because it does not include “underemployed” workers which is true.  There are two types of “underemployed” workers.  First, there are people who have unsuccessfully sought employment for so long that they have given up looking for a job.  Second, are those workers  that currently have a part time position but indicate that they would like full time employment.  The total of these two types of underemployed workers are  “marginally attached” to the labor force.  The number of marginally attached workers is essentially  where it was going into the recession.

We should probably be focusing more on the broadest measure of unemployment because it includes these underemployed individuals.  The broad rate fell 0.3% in September to 6.9% after having risen 0.2% in August.  At 6.9% it is lower than where it was going into the recession.  It is hard to argue that there is slack remaining in the labor market.  The broad rate fell 0.3% in September to 6.9% which compares to 3.5% for the official rate.

As the economy continues to expand the pace of hiring will remain steady and  both rates are going to fall.  As firms look a bit harder to find the workers they need they may have to turn to other sectors of the labor market rather than just currently unemployed workers.  They may seek younger workers, but they may have a difficult time because our youth unemployment rate is the lowest it has been in more than 48 years.

They may also look at some of their part-time workers who are reliable and have a good work ethic and offer them full-time positions.  But the number of part time workers who say they want full time employment is roughly in line with where it was going into the recession.

In short, both rates should continue to fall slowly in the months ahead and are already below their full-employment threshold.  In that world labor shortages are likely to become even more evident in the months ahead.  That will put upward pressure on wage rates.  Thus far the 4.4% increase in wages is being partially offset by a 1.8% increase in productivity such that “unit labor costs” (or labor costs adjusted for the increase in productivity) have risen 2.6% in the past year.  With unit labor costs increasing at this pace it seems quite likely that the inflation rate will begin to climb in the months ahead.

Stephen Slifer


Charleston, SC