What the Skeptics Get Wrong About Unemployment

Editor's note: If you're expecting a recession, the hot jobs market might have you stumped right now. So today, Joel Litman – chief investment strategist at our corporate affiliate Altimetry – is clearing the air. In this piece, he debunks a common misunderstanding about the labor force. And he reveals what investors should pay attention to instead...

Jobs data is still defying the odds...

The January unemployment rate came in at 3.4%, its lowest level since May 1969. The U.S. added another 517,000 jobs to the economy. Economists only expected an additional 187,000 jobs.

The labor market beat expectations by a landslide. And these numbers are even better than the strong data we've seen in recent months. The U.S. added 223,000 jobs in December and 256,000 in November.

There's a bit of a mismatch, though...

January's data suggests that the job market is still white hot. And yet, other market-outlook indicators – like the inverted yield curve – suggest that we're on the verge of a recession.

Some people reconcile the raging job market and the economy's tenuous footing by saying that 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.

The problem is that when it comes to this alternative measure, most folks are missing a crucial detail.

Today, we'll take a closer look at two ways of determining the health of the job market. And I'll explain why unemployment is going to be an issue eventually – just not for the reason some people think.

Some skeptics are sounding the alarm on labor-force participation...

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 the 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 potential 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.

That doesn't mean the unemployment rate will stay historically low forever...

The Federal Reserve is actively trying to raise unemployment. So we expect that number to rise in the coming months. The tech industry has already started the year by cutting tens of thousands of jobs... And another round is likely on the way.

However, that's also 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.


Joel Litman

Editor's note: Two legendary investors who called the 2020 crash are stepping forward with an urgent stock prediction. It involves the pullback in stocks we saw this week... a market shift that no one sees coming... and a rare group of investments that is known to soar at moments just like this one, even if we see more volatility from here. You can learn the details here.

Further Reading

"If you ask CEOs what they see in their own businesses, the fundamentals look fine," Brett Eversole writes. "But if you ask them about the overall picture, they expect everything to deteriorate quickly." This recent paradox in sentiment is important to understand... Find out what it means for investors right here.

Everyone is trying to get ahead of the Federal Reserve's next move. Are more rate hikes coming? Or will the Fed change its aggressive stance? When you look closely at the economy, the answer is more complicated than it seems... Read more here.