The December unemployment rate came in at a 50-year low of 3.5%. The U.S. added another 223,000 jobs to the economy. Economists only expected an additional 200,000 jobs.
That means the labor market beat expectations. And these numbers are in line with recent months. We added 256,000 jobs in November and 284,000 in October.
There's a bit of a mismatch, though...
December's data suggests the job market is still white hot. And yet, other market-outlook data indicates we're on the verge of a recession.
Some people reconcile the raging job market and the economy's tenuous footing by saying jobs data is misleading. They claim unemployment rates are only low because no one wants to go to work. And they back up this idea using an entirely different metric.
Today, we'll take a closer look at two ways of determining the health of the job market. We'll dive into how both rates are calculated... and try to clear the air around what's going on in the economy.
And we'll explain why unemployment is going to be an issue eventually – just not for the reason some people think.
The labor participation rate measures what percentage of working-age Americans are employed or looking for work.
This is separate from the unemployment rate, which is simply the number of unemployed Americans divided by the labor force.
On its surface, the labor participation rate looks like it's plummeting. It was 62% in December... inching toward its lowest level since the mid-1970s (not counting a brief dip at the onset of the pandemic). And it has been trending lower since 2007.
Take a look...
If participation is tanking, folks claim the unemployment rate may not be as useful as it once was. They say unemployment looks low because people aren't looking for work, not because everyone has jobs.
In fact, some argue it means the unemployment rate is artificially low.
It's true that weak labor force participation could be cause for concern. If fewer people are looking for work, it might suggest a shortage of workers in the economy. That could slow economic growth.
Here's the issue... Most people don't really understand labor force participation rate.
Anyone who's over the age of 16 and able to work is counted in the labor force. You never leave the labor force by that definition.
Since 2007, a large percentage of Baby Boomers – folks born from roughly the mid-1940s to the mid-1960s – have reached retirement age. That's a big chunk of the American workforce that's no longer working.
So it's no surprise that labor force participation is declining. While people are aging out of the labor force, they're still being counted as workers.
This is a massive flaw in how the rate is calculated. It's why we don't expect levels to recover anytime soon.
And it means labor participation shouldn't change how we view unemployment.
The Federal Reserve is actively trying to raise unemployment. It seems like it's finally starting to work. We expect that number to rise in the coming months.
Tomorrow, we'll cover an industry that's leading the pack in layoffs. The tech industry has started the year by cutting tens of thousands of jobs... And another round is likely on the way.
That's a sign that higher interest rates are starting to do their job in slowing the economy.
For now, don't listen to the people claiming unemployment data is unreliable. Most of them don't understand what they're looking at.
Even if labor force participation keeps falling, you can still learn a lot about the economy from unemployment data.
January 23, 2023