Why You Can’t Rely On The Unemployment Rate As Primary Economic Indicator

You’ve probably heard recently that the U.S. unemployment rate is very low. Indeed, it’s been dropping consistently from its October 2009 peak of 10.2% to the decade low of 4.1% just set in October 2017.

It makes for neat and tidy headline news. But, this seemingly favorable economic condition is not as great as it may seem. There’s much more to the labor market story that requires a deeper dive to uncover a more textured reality.

The Unemployment

Though the unemployment rate has indeed plummeted 60% since 2009, the amount of people not in the labor force has increased significantly during this same period. At this point, many of you might be scratching your head asking, “Wait, how can unemployment be lower, while so many more people are not working?” It’s a good question and it gets us into the subtleties that surround economic terms and metrics.

For starters, the unemployment rate measures the percentage of people (working age = 16 years old and above) who do not have a job but have been actively looking for work in the past four weeks and who are currently available for work. It doesn’t matter if a person is collecting Unemployment Insurance benefits or not to be counted in this figure.

Primary Economic Indicator

By contrast, people who are not in the labor force include people of all working ages who are neither employed nor unemployed. Confused yet? Don’t worry: Most financial professionals don’t understand this difference, nor do they understand that there are multiple layers of labor statistics available.

What’s more interesting than seeing an increase in people not working are the reasons why they are not working as well as the demographics who have seen shifts (up or down) in labor force participation.

You might initially think that the baby boomers have been retiring in droves and that this has been a natural force behind the growth in the number of those not participating. On closer inspection, however, the number of adults aged 55 and older who are not participating in the workforce has actually decreased in recent years.

The career of an engineer

If the baby boomers aren’t the culprits, then who has been the biggest driver (as a percentage) to the dwindling labor force numbers, and why? According to the BLS, there’s been a significant increase in the 16-to-24-year-old population not in the labor force and, more importantly, due to the reason of “going to school”. 

This is one of the most positive underlying labor statistics and perhaps one even more descriptive of future labor market conditions than the backward-looking unemployment figures.