We are not in the middle of what many economists and experts are referring to as a “tight labor market.”
An FKD Feature exclusive

The unemployment rate hit 4.4 percent in April — its lowest mark in a decade. Yet, in that same decade, wage growth has stagnated and labor force participation is nowhere near the crushing highs of the ‘90s economy.

Typically, we’ve seen low unemployment matched with periods of wage growth and inflation (the good kind). So, it’s a little startling that the numbers aren’t adding up the way they usually do.

The folks at Bloomberg published a piece last week that went over all the many theories as to why this might be happening. It read sort of like a transcript of Italian grandmothers arguing over the “right way to make pasta sauce” — lots of opinions, no definitive answer.

And while the article did mention several interesting factors and theories that could be playing into this phenomenon, it failed to address the real issue here: the unemployment rate basically doesn’t mean anything.

Doesn’t it measure how many people are jobless?

To an extent, yeah it does. But when compared to almost any other metric of economic success, it proves to be an effectively useless tool.

The unemployment rate only accounts for the share of the labor force that is jobless. Since people can pop in and out of the labor force for a variety of reasons, the unemployment rate isn’t an accurate reflection of positive growth.

What matters way more is the labor force participation rate, which, as it turns out, isn’t looking great at all. Labor- force participation measures the percentage of eligible workers who are employed or actively looking for a job. You could be 35 and able-bodied, but if you haven’t looked for a job in several months, you’re not factored into the unemployment rate.

Labor force participation is sitting at 62.9 percent, a full 3 percent lower than before The Great Recession and roughly 5 percent lower than in the late ‘90s, when unemployment looked the same as it does today.

What’s that about?

The stark contrast could be the result of several factors, but the most plausible of them all is that people simply aren’t qualified to hold the majority of jobs available.

As new technologies have been introduced, employers’ needs have changed. The labor force (read: us) hasn’t kept up the pace. Manufacturing jobs are disappearing, being replaced by engineers and coders. Assembly line and minimum wage jobs can be done by robots, creating space for IT workers and the like.

"In other words, we shouldn’t be expecting wages to go up just because unemployment is low."

And that’s perfectly fine, in fact, it’s good. It means we’re advancing as a society.

The problem is those folks who held jobs in manufacturing and manual labor don’t have what it takes to become the mechanical engineers their companies need. Those new, tech-heavy roles are going to be filled by the younger generations entering the labor force.

What that means is that it’s going to take some time before these numbers balance out in the way we’ve come to expect.

What does this mean for me?

The most straightforward answer to that question is: Don’t use the unemployment rate as a sign that good times are around the corner.

More importantly, understand that we are not in the middle of what many economists and experts are referring to as a “tight labor market.” In other words, we shouldn’t be expecting wages to go up just because unemployment is low.

What this means is that if you want to see higher wages, focus on the industries experiencing a lot of growth and jobs that are in high demand. It means that graphs and theories are great on paper, but you need to pay attention to the modern landscape to best position yourself for future success.

 

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Header image: Getty

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Posted 05.25.2017 - 04:50 pm EDT