Behind the Unemployment Rate

“US unemployment rate is at a 49-year low,” blazes news headlines this week. Forty-nine years ago was 1969, the year America landed astronauts on the moon and also the year America was in the middle of the Vietnam War — when a good chunk of the labor force was drafted in the military, no wonder the unemployment was under 4 percent. Most of the gains in jobs were in professional and business services, while the retail sector experienced job cuts. Still, the rate was higher than expected due to blows from Hurricane Florence. The economy is indeed booming with the GDP at a 4.5 percent increase this quarter, but of course the low unemployment rate tells two stories — one of a currently strong economy and one of a small labor force.

The labor market is currently tight, meaning that businesses are trying to hire more people than the number of people available to be hired. This is good news for wage growth, since businesses will have to start competing for people who are already employed. Amazon, for example, has raised its minimum wage to $15 an hour for U.S. employees. It also encourages employers to start hiring those who are normally excluded from consideration, like those with criminal records or the disabled. The unemployment rate only accounts for people who are considered part of the labor force, so the rate includes only people who are actively looking for employment. The shrinking labor force can be attributed to a variety of reasons, from the opioid epidemic to the skills gap.

If the economy is strong, why is the stock market pessimistic (the S&P 500 fell the most in one day since June)? Recent tax cuts and deregulation have contributed to economic growth, but tax cuts reduce federal revenue, which is struggling to keep up with rising federal spending, increasing the budget deficit. The high growth however, runs the risk of an overheating economy, which can cause rapid inflation. Therefore, the Federal Reserve usually will want to raise interest rates to slow down growth as it has done frequently recently. Rising interest rates, however, not only make investors wary, it also means that the government will have to designate more money towards servicing interest payments on the national debt.