{"id":1586,"date":"2019-09-03T06:00:49","date_gmt":"2019-09-03T06:00:49","guid":{"rendered":"http:\/\/www.uniontrack.com\/blog\/?p=1586"},"modified":"2019-09-03T05:22:35","modified_gmt":"2019-09-03T05:22:35","slug":"unemployment-rate","status":"publish","type":"post","link":"https:\/\/uniontrack.com\/blog\/unemployment-rate","title":{"rendered":"It\u2019s Not That Simple: A Deeper Look at the 4% Unemployment Rate"},"content":{"rendered":"

Ken Green
\nCEO\/Founder
\nUnionTrack, Inc.<\/a><\/p>\n

The Trump administration has regularly boasted about its role in driving the nation\u2019s unemployment rate down for the last two years. A report on Trading Economics<\/a> shows that as of June 2019, the unemployment rate was 3.7 percent after hitting a 40-year low of 3.6 percent in May.\u00a0<\/p>\n

Great news for workers, right? With the unemployment rate this low, a majority of working-age Americans should be employed, and wages should be going up as the supply of labor lags behind demand and companies have to fight a talent war.\u00a0<\/p>\n

But this is not the reality of the labor market.<\/p>\n

\u201cThe 3.7% rate overstates the true strength of the labor market,\u201d says economics professor Peter Ireland<\/a>, a former researcher at the Federal Reserve. \u201cThings are good but not that good.\u201d\u00a0<\/p>\n

The unemployment rate alone doesn\u2019t tell the whole story about the strength of the labor market. The other side of that coin is the labor force participation rate, which has long been on the decline. That number does help drive down the unemployment rate, but not in a good way.\u00a0\u00a0<\/p>\n

What Declining Labor Force Participation Means<\/h2>\n

The unemployment rate represents the percentage of people in the labor force currently without jobs who have been actively looking for work within a four-week period. The key phrase here is \u201cactively looking.\u201d Those who have stopped actively seeking work are not considered unemployed and are excluded from the unemployment rate.<\/p>\n

That significantly skews unemployment numbers.<\/p>\n

This is where labor participation rate comes into play. The labor participation rate is the ratio of people actively participating in the workforce compared to those who are eligible to participate. This number has been consistently declining as more people retire and high numbers of long-term unemployed have quit looking for work. As this number continues to go down, so does the unemployment rate.<\/p>\n

By ignoring discouraged workers, the unemployment rate ignores about 29 million people who have quit looking for work and are simply waiting to rejoin the workforce when the right opportunity arises, reports Geoff Colvin<\/a>, editor at Fortune Magazine.<\/p>\n

To get a truly accurate unemployment rate, these discouraged workers would need to be included in the ratio. Without them, it\u2019s an inflated number that doesn\u2019t truly represent what is going on in the labor market.\u00a0<\/p>\n

John Harvey<\/a>, professor of economics at Texas Christian University, explains that had the labor participation rate not consistently fallen to its current rate of 62.9 percent<\/a> over the past 12 years, the current unemployment rate would be more than double.\u00a0<\/p>\n

In reality, the unemployment rate is so low not because record numbers of people are finding jobs, but because so many have been dropping out of the workforce, reports Dean Baker<\/a>, economist at the Center for Economic and Policy Research.\u00a0<\/p>\n

This is a significant discrepancy that has serious ramifications, one of which can be tied directly to workers\u2019 paychecks.\u00a0<\/p>\n

\"Young<\/p>\n

Workers\u2019 Wages Aren\u2019t Increasing<\/h2>\n

Theoretically, pay should be rising because everyone who wants a job should be able to find one. But that isn\u2019t happening. Jeffrey Snider<\/a>, head of global research at Alhambra Investment Partners, explains that income growth in 2018 was about half of what it was in 2014.<\/p>\n

Labor market slack, fueled by the declining labor participation rate, is one of the key reasons companies aren\u2019t feeling any pressure to increase wages.\u00a0<\/p>\n

Mark Paul<\/a>, a fellow at the Roosevelt Institute and a professor of economics at New College of Florida, explains that mainstream economic theory holds that a tight labor market leads to rising wages, with the biggest benefits going to workers on the lower end of the labor market pay scale. But wage stagnation for these workers suggests that the labor market isn\u2019t as tight as the unemployment rate indicates. Slack in the labor market is keeping the pressure off of employers to increase worker pay.<\/p>\n

This has weakened the power of workers and led to stagnation in growth and an increase in the wage gap<\/a> between top earners and bottom earners.\u00a0<\/p>\n

Drew DeSilver<\/a>, senior writer at the Pew Research Center, reports that since 2000, usual weekly wages have risen 3 percent (in real terms) among workers in the lowest tenth of the earnings distribution and 4.3 percent among the lowest quarter. Simultaneously, real wages for the top 10 percent of the distribution have risen 15.7 percent.\u00a0<\/p>\n

Underemployment\u2019s Impact Is Overlooked<\/h2>\n

If the labor market was truly as strong as the unemployment number suggests, workers would have a lot of options for work and correspondingly higher paychecks from companies recruiting them, says David Blanchflower<\/a>, an economist at Dartmouth College. Instead, workers are experiencing high levels of underemployment at low-paying jobs.\u00a0<\/p>\n

Underemployed describes workers who are:\u00a0<\/p>\n