CHART OF THE WEEK
The latest employment report has met with a mixed reaction from the markets. Although May’s unemployment rate has fallen below previous cycle lows to 4.3%, most comments focused on the disappointing number of job creations (138,000 versus an expected 182,000). Along with the lower unemployment rate came a fall in underemployment, which includes those working part-time because they cannot find full-time employment.
The Federal Reserve estimates that the economy needs to create just over 70,000 jobs per month to reduce the unemployment rate. When the labour market is tight and the economy is approaching full employment, it is harder to recruit. Indeed, May’s NFIB Small Business Jobs Report notes that small businesses are struggling to fill job vacancies more than at any time since 2000. However, unlike in countries such as Germany and Japan, the tighter labour market has not pushed the labour force participation rate upwards.
The labour force participation rate measures the percentage of the working-age population that is currently in work or actively looking for employment. As the graph shows, this rate fell sharply between 2008 and 2013 but has stabilised since, hovering between 62.5% and 63%. Key to deciphering the labour force participation rate is understanding to what extent the fall was either cyclical, due to the effects of the 2008-2009 financial crisis, or structural, resulting chiefly from an ageing population.
In the first scenario, a higher participation rate would have tempered the impact of new job creations on the unemployment rate, allowing the Fed to maintain its accommodative stance for longer. However, since the participation rate has not risen despite the unemployment rate reaching new lows, structural factors seem to be behind the fall (see graph). As such, the strong likelihood of fresh falls in the unemployment rate could well lead the Fed to tighten monetary policy further.
The opinion expressed above is dated June 6th, 2017, and is liable to change.
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