The Non-Farm Payroll Employment Change figure came out to a surprise of to adding 271K jobs in October giving the greenlight for the Feds to raise interest rates. In addition, the average hourly earnings rate rose by 9 cents to $25.20. However, the participation rate remains at record low at 62.4% showing how the employment figures can provide false hopes to actual economic utilization of labor.
Let’s take a look at the relationship between these three figures. The labor force comprises of employed and unemployments persons of the United States. A discouraged worker is a removal from the labor force and so the unemployment rate can keep falling with more exits from the labor force. The record low participation rate signals that there is a close to record low of the number of people looking for work.
At first look, it makes sense to see a falling unemployment rate as the contribution to a rising number of employed persons and falling number of unemployed persons represent more people finding jobs.
If we were to look at the relationship between the unemployment rate and the labor force participation rate, it looks almost correlated. As the labor force participation rate falls or a removal the unemployed workers actively seeking jobs, this causes a drop in the unemployment rate figure. Of course, the labor force participation rate could also drop if employed workers choose to quit their job and no longer choose to actively find work. Rationally speaking, how likely is it for somebody to quit their job and decide to not work another day in their life? This does not seem likely and so we will focus our attention on the discouraged workers.
For your reference of the two formula calculations:
Since you know that the labor force comprises of employed and unemployed workers, you can see that an exit of unemployed workers will shrink the labor force hence leading to a lower labor force participation rate. Similarly, it affects the unemployment rate as the numerator with number of employed workers staying constant while the denominator of total labor force shrinks. This would cause a decrease in the unemployment rate.
*Note: the picture of the formula the unemployment rate should show the numerator should show the number of unemployed workers. However, it produces the same result as you would just deduce the employed workers from the labor force.
This is not the say my basic understanding of economics is going to spell trouble for the U.S. economy, but you can see that it is not too hard to identify how problematic the U.S. labor market is right now. The low unemployment figure normally would be a bullish sign of the economy, but factoring the participation rate paints a different picture regarding the labor conditions in the U.S.
I would look at it from the approach from the business confidence standpoint because it also indirectly predicts consumer behavior. Put it this way. When consumers have money, they spend it and supposedly contribute to inflation. Business confidence indicators measures how optimistic businesses are of future market conditions. They may hold off expansions, inventory purchases, and so on if they do not foresee a profitable future. At the current state, I prefer to use the Business Confidence indicators simply because these indicators have not been picking up on new reports of number of job increases.
Earlier this week, Yellen hinted at a rate hike for December, 2015. I don’t believe we will see a significant rate hike. At this point, Yellen has been pressured by the market to signal a rate hike to reassure that the economy is on track. My projection is a series of moderate hikes somewhere between 0.1% to 0.25% over the course of the next few years.