Unemployment Rate Hides Reality of Labor Market

By Michael Gabrellian ’17

The falling unemployment rate doesn't fully describe the state of the labor market.

The falling unemployment rate doesn’t fully describe the state of the labor market.

More than five years after the bankruptcy of Lehman Brothers sent global financial markets and economies into a tailspin, the United States labor market is still reeling from the affects of the recession that officially ended in June 2009. On paper, conditions seem to be improving due to the steady decline in the headline unemployment rate, which has fallen from a peak of 10% at the end of 2009 to 7.2% this September.

In reality, however, that decline does not reflect a significant improvement in the labor market. The drop has been primarily due to people leaving the labor force either because they have been out of work too long and are therefore ineligible to be considered unemployed, or because they have simply gotten discouraged and stopped looking for employment. Labor force participation in the US has declined from a pre-recession average of about 66% to a current level of 63.2%. If those millions of Americans were still considered part of the labor force, then the unemployment rate would be much higher than it actually is.

Another important development in the US labor market has been the increase in people working fewer hours than they want to or in lower-skilled jobs that they are overqualified for. Since they are working, however, they do not count towards the unemployment statistic. Nonetheless, those workers are earning a lower income than they would prefer.

The problem is no longer Americans losing jobs. Initial jobless claims have more than halved since the depths of the recession in early 2009, and claims are nearing their long-term average. The main reason for the stagnant labor market is extremely slow job creation. On average in 2013, the US economy has created about 180,000 jobs each month, well below its pre-recession effort. While any job creation is better than none, the minimal positive affects of this pace are diminished by population growth.

The major topic of the 2012 US Presidential Election was how to revive economic growth and increase the rate of job creation in the country. Due to the divided federal government and conflicting interest groups, few policies have been enacted that encourage businesses to hire more employees. Uncertainty over fiscal policy, a poor start to the implementation of the Affordable Care Act, and the recent weak economic data all have businesses hesitant to expand and take on additional staff. Corporations are sitting on record piles of cash and could easily hire additional workers, but this would only occur if growth makes expansion necessary.

A weak labor market is especially troubling since about two-thirds of US Gross Domestic Product is derived from consumer spending. After a mediocre back-to-school shopping season, economists will closely monitor what retailers report in regard to the holiday shopping season. This will offer a snapshot of how Americans view their job prospects and their current financial security.

Many of the jobs lost during the recession will not be recovered because of technological advances that have replaced the need for certain workers. Many people fear that infinite improvements in technology will result in a small concentration of economic power and mass unemployment. Technology, however, has been replacing jobs for hundreds of years as society changes and develops. That change presents additional employment opportunities as new industries develop. If policymakers can establish an environment that promotes economic growth and business expansion, then new industries can emerge that help solve the nation’s unemployment crisis. Otherwise, the US is doomed to continue seeing stagnant wage growth, sluggish job creation, and a persistently high unemployment rate.






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