Educational: Unemployment (3) Other Indicators
In the last posts, we discussed why the analyzing the labor market was important (here). And we went through the main indicator for the labor market, unemployment rate and NFP (here). With those posts, we manage to get a basic understanding of how to follow the labor market.
However, there is more to it. So we are going to go through other indicators that will help us to better understand what unemployment rate and NFP are telling us.
- Civilian Labor Force ParticipationThe unemployment rate can go up or down for two reasons. The most obvious one are changes in Payrolls. If there is more people working unemployment rate should go down, and if there fewer people working unemployment should go up.
However, it can also change if there are changes in a number of people “looking for a job”. Lets put an example. If I had an economy of 10 people. Where 8 people wanted to work and two people for whatever reason didn’t want to work. Labor force participation would be 80% in this economy (8/10). Now if out of those 8 people 6 were working and 2 were not, then out unemployment rate would be 25%.
So if one more person now goes from unemployed to not “wanting to work” then participation rate will be 70% (7/10) but unemployment rate would be 14.2% (6/7). As you can see this can be quite deceiving, the unemployment rate has gone down but not because there are more people working but because someone has just decided to stop bothering looking for a job. This is why it’s VERY important to keep an eye on the labor force participation, especially in the long term.
As you can see in the graph this rate it’s now at a very low point, the current crisis pulled it down by a lot. That’s why some people believe that the current levels of the unemployment rate in the US are not very reliable. As long as all these people are out of the market, the crisis won’t be over.
What does it mean for me? In the short term, it doesn’t mean much, as long as NFP stay positive we are doing fine. But in the long term, this personally makes me believe that there are still many jobs to be created before we reach the peak of the cycle.
- WagesWages are very important when studying the labor market, at the end of the day wages are the cost of labor. We understand that companies use capital and hire people in order to produce goods or service.
When the economy is expanding we firms find themselves in a situation where there is a lot of money to be made. Therefore they are willing to hire people to produce things that they will be able to make a lot of money on. So at the beginning at the expansion phase is common to see unemployment going down, as companies want to employ people. But once unemployment is very low companies have now to compete for hiring people.Not hiring is not an option, because not hiring means not making money, nobody likes that. So they have to go and compete with other companies, which means paying higher salaries to workers.
As a consequence of this, an increase in wages is normally a sign of a mature expansion phase of the cycle. This doesn’t mean we are at the peak or that the expansion is going to finish, but we are now closer to the top than to the bottom.
As we can see salaries have been going down until 2015 when it started going up. This means that we are now heading to the second part of the expansion phase.
I believe with this two indicators a very good way of putting into context whatever is happening in the job market. The economy is not a perfect machine, so it’s impossible to predict or to know what’s exactly going to happen, but I believe that understanding where we are and in what context we are, can be very useful for investing.
Nuño Pérez del Barrio