Practical analysis for investment professionals
02 December 2019

The US Labor Market: Weaker Than It Looks?

The US labor market has enjoyed strong growth over the last several years. Job creation has been robust, and the unemployment rate has fallen more or less continuously since 2009, reaching a 50-year low of 3.5% in September 2019.

But these figures don’t tell the whole story.

US Unemployment Rate (%)

Sources: US Bureau of Labor Statistics, Earthen Street Capital

The fact is the US labor market has a big problem in the form of a low labor force participation rate. This metric calculates the effective size of the labor force — specifically, the percentage of working-age people who have a job or recently looked for one. By definition, it excludes those unemployed who have given up on finding a job and effectively dropped out of the workforce.

And the percentage of these nonparticipants is much higher than it should be in an economy that has expanded for 10 years and is supposedly at or approaching full employment. In October 2019, the US labor participation rate was 63.3%. Eighteen years before, in October 2001, amid the recession that followed the bursting of the Tech Bubble, it stood at 66.7%.

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The Long-Term Trend

Indeed, the US participation rate has been in secular decline since 2000. The rate of job growth is not keeping up with the pace of growth in the working-age population. So fewer people are finding or maintaining a place in the labor force — either because they lack the skills to enter it or are falling out of it.

This points to a significant opportunity deficit for US workers.

The US population growth rate has been steadily declining since 1992, so the working-age population is not growing as fast. So the falling participation rate amid these trends indicates a sharp increase in the number of long-term unemployed. Presumably this cohort is composed of predominantly older workers who perhaps have lost jobs and are having a hard time finding new opportunities and reskilling for new technologies.

US Population Growth and the US Labor Participation Rate (%)

Sources: US Bureau of Labor Statistics, World Bank, Earthen Street Capital

Amid these trends, the US economy has enjoyed a period of almost uninterrupted expansion. We can extrapolate then that automation and outsourcing are putting a crimp on the number of available jobs.

While outsourcing drove job losses in the 1990s to the early 2000s, automation is the bigger driver today. And as companies automate, low-skilled and older workers are the most likely to be replaced. And such demographics tend to face more difficulties reintegrating into the workforce.

And consider this: Even after the longest economic expansion on record, the US labor participation rate has yet to return to where it was before the Great Recession. Once companies cut costs through automation, there is no going back.

So, even amid all the innovation, opportunity, and wealth created during the recovery, the outlook for US workers in general is worse than it was in October 2008, in the early days of the global financial crisis, when the labor force participation rate stood at 66%.

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Given the divergence between a shrinking labor participation rate and record low unemployment, the historically low US unemployment rate hardly reflects the true US employment picture.

And the opportunity deficit perpetuates itself. So much surplus labor impedes wage growth. Which is why, even amid “full employment,” workers’ wages have stagnated.

There are other implications: Less labor participation means a weaker consumer and consequently weak inflation.

Total US Nonfarm Payroll (YoY Percentage Change)

Sources: US Bureau of Labor Statistics, Earthen Street Capital

What’s Next

To be sure, the news isn’t all bad. The participation rate has stabilized post-2015, which suggests that job growth is keeping pace with the tide of new working-age entrants into the labor force. For now.

But the current economic uncertainty presents ample risk. Demographic headwinds, trade disputes, and a slowing economy could put further pressure on the labor force. Job growth has already started tailing off.

Thus, we can expect the US labor participation rate to resume its relatively uninterrupted downward trajectory of the last 20 years.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

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About the Author(s)
Dhruv Goyal, CFA

Dhruv Goyal, CFA, is the founder of Earthen Street Capital. He specializes in global macro research, and sovereign bond and currency investments. He has more than 15 years experience in the industry and has previously worked with Nationwide Insurance, Wisconsin Alumni Research Foundation, and CUNA Mutual Group in the United States. He holds an MBA from University of Wisconsin-Madison and is a CFA charterholder.

5 thoughts on “The US Labor Market: Weaker Than It Looks?”

  1. Todd Bunton, CFA says:

    The long-term decline in the labor force participation rate is largely driven by our aging population. More than 10,000 people in this country turn 65 every day, and at least some of them are leaving the workforce.

    A much more relevant metric is the labor force participation rate for prime-age workers (ages 25-54):

    That metric has been rising since 2015 and is back near pre-Great Recession levels.

    Also, a more comprehensive unemployment rate metric is the U-6 rate, which includes all persons marginally attached to the labor force (including discouraged workers), plus those employed part-time for economic reasons:

    That metric is near 25-year lows.

    So the labor market is strong by these more relevant metrics – for now, at least.

    1. Dhruv Goyal, CFA says:

      Thanks for sharing your thoughts.

      I agree that proportion of elderly people is rising in the US population. However, this only partially explains the decline in participation rate. In fact, even if you take out 65+ population from total, the participation rate still shows a similar trend.

      Moreover people are working longer. Therefore one should include 54-64 cohort also in calculation of participation rate and not leave them out. I find the two metrics that you mentioned useful but not comprehensive enough. The first one ignores people aged 54+ and 25- while the second one ignores those out of labor force for more than 12 months.

      1. Todd Bunton says:

        Thank you for your reply. According to the BLS, the labor force participation rate for those 55-64 years old is actually rising (as it is for those 65+):

        But since participation rates for these cohorts are lower than prime-age workers, they are putting downward pressure on the overall labor force participation rate, since the Baby Boomers are still 73+ million strong!

        The participation rates for those under 25 have declined over the last 20 years, but a lot of this can be explained by higher school enrollment, according to this report:

        As for those not in the labor force, that number has held steady over the last couple of years (, with the vast majority citing “do not want a job” as the reason, compared to those who want a job ( Again, demographics (retirees) is largely at play here.

        To be clear, I’m not saying there aren’t pockets of weakness in the labor market, but I do think it is pretty solid, even when you look beyond some of the headline numbers (again, for now).

  2. Thank you Todd for jumping in with my point of view… I will only add that average hourly earnings of non-supervisory employees have been outpacing the overall earning rate for the last six months or so (FRED). Daily Shot on 12/9/19 has nice graph on this.

  3. Ronald Fischbach says:

    What do you see as the long term impact of robotics and artificial intelligence on the job market? Do you agree that ever increasing automation will reduce job creation. It would seem that job preparation, college or high school, has not taken into consideration the true nature of the projected job market. But, even if suddenly preparation would align with job market needs the replacement of humans by machines is not going to be reversed. Just consider the jobs lost by self-driving cars and trucks. What do you see for the future? Will we have an ever increasing permanently unemployed? And, how do we get money into the hands of consumer when more of them are not fully employed?

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