MNI ANALYSIS: 18-Year Low US U-Rate Not As Tight As It Looks

By Holly Stokes

     WASHINGTON (MNI) - In recent decades a 3.8% unemployment rate has proven

unsustainable, causing analysts to question if history will repeat itself and

how much tighter the labor market can get after May's employment report.

However, given the changes the U.S. labor market has undergone in the last

18-years, historical comparisons may lack predictive capacity and the labor

market may not be as hot as it initially appears.

--U-RATE HISTORICALS SUGGEST UNSUSTAINABLE

     In April 2000, when the unemployment rate last hit 3.8%, it was unable to

maintain the low level for even a second month - jumping back up 0.2pp in May.

Prior to 2000, a 3.8% unemployment rate was last seen in the late 1960s, when

again the low levels proved difficult to maintain. In the 1960s, the

unemployment skirted generally below 4.0% from 1966 to 1969. Though able to

cling to a low level for several months, this period ended with a swift upward

jerk - rocketing up 2.6pp in 1970.

     Further, through comparing GDP year/year growth, it can be seen that not

only were these periods of low unemployment unsustainable, but they also were

precursors to marked slowdowns in economic output growth.

     Given this history, May's low unemployment rate could be heralded as an

early warning sign of an overheating labor market and a potential softening in

GDP growth in the next few years, if mounting wage pressures push up inflation

and in turn the cost of investment. However, to assume that these historicals

are predictive would disregard the many shifts in the labor market outside of a

falling unemployment rate.

--SOFTER WAGE PRESSURE

     Despite the low unemployment rate, wage gains remain relatively muted.

Since the series start of average hourly earnings of production and

nonsupervisory workers, the longer tracked measure of wage gains, wage inflation

has risen an average 4.2% on a year/year basis when unemployment is 3.8%. This

is significantly higher than May's 2.8% rise.

     While analysts remain at odds as to why wage pressures remain muted, it is

clear that wage inflation is much softer than typical for this level of

unemployment rate. As the current labor market does not share the same wage

pressures as seen in the late 60s or even in 2000, the unemployment rate is not

as indicative of mounting pressures on business costs and inflation.

--LABOR FORCE PARTICIPATION MUTED

     The current low unemployment rate has been facilitated by the continued

presence of discouraged workers that have not yet re-entered the workforce.

May's decline in the unemployment rate was aided by a small decline in the

civilian labor force participation rate to 62.7% - declining for the third

consecutive month, a trend that coincides with finally breaking the 4.1% string

of unemployment. 

     In 2000, the labor force participation rate was much higher than it is

today - at 67.3%. In fact, the labor force participation rate has remained muted

since the recession. Consequently, a 3.8% unemployment rate now as opposed to in

2000 is actually less indicative of as tight of a labor market, as discouraged

workers hang in the wings of the economy.

Further, while some argue that a decline in the participation rate is due to

baby boomers retiring, a look at the employment to population ratio, EPR, of

prime age workers, shows that there is an underlying cause outside of the shift

in demographics. 

     The EPR for prime age workers reached an all time high of 82.0% in April

2000, coinciding with the 3.8% unemployment rate. In this case, there was not

only low unemployment for those actively seeking work, but a greater degree of

the working age population was employed - evidencing that the unemployment was

not just due to a lack of participation.

     In comparison, the current rate at 79.2% is lower than levels seen in the

early 2000s, as both the 2001 and 2009 recession took a visible toll. The muted

EPR in conjunction with a lower participation rate show that many workers remain

discouraged, and that even with a 3.8% unemployment rate the labor market is not

as tight as it was 18 years ago. 

--NEW WAYS TO COMBAT SHORTAGES

     Outside of the slack left by discouraged workers, businesses have also

found new ways to circumvent prior challenges and pressure created by tightening

labor markets.

     The April release of the Beige Book noted that as businesses face

tightening labor conditions, they have found innovative ways to respond to labor

shortages including enhancing training and using automation. Through these

efforts, employers are able to avoid hiring more employees at higher wages.

     The availability of technology to fight labor tightness has continued to

grow dramatically. A 2017 study by McKinsey Global Institute expects that by

2030, about 60% of jobs will see roughly one-third of the activities in that job

automated - so while jobs are not destroyed, tasks will require less employees'

time and thus less total employees.

     The ability of employers to maneuver around rising wage pressures in

conjunction with slack left by discouraged workers creates a very different

economic landscape for a 3.8% unemployment rate than in 2000. And while there is

no question that there is a healthy labor market from business reports of

difficulty hiring and consumers' rising confidence in their ability to find a

job, historical comparisons predicting an overheating appear overzealous as a

3.8% unemployment rate just isn't what it used to be.

--MNI Washington Bureau; +1 202-371-2121; email: holly.stokes@marketnews.com

[TOPICS: MAUDS$,M$U$$$]