Labor Market

Labor Market


Data on this page was last updated on May 18, 2023

Business investment, consumer durables purchases, and housing are incredibly cyclical parts of the economy. Adverse spillover effects from highly cyclical sectors can cause the overall economy to stop growing, but not all sectors need to slow for a recession. These spillover effects vary from cycle to cycle. Housing spillover effects were more significant during the 2007-2009 recession because of all the financial activity and related jobs and spending that the housing boom created. Tech stock spillover effects were unusually significant in the early days of the first Internet boom at the turn of the century. The risk of missing a recession because your analysis did not include the cause of the downturn is possible if the study does not have the labor market factored in.

Aggregate employment is cyclical because it includes all sectors, acting as a catch-all for the business cycle. One’s analysis might have missed the tech bubble in 2001 or the real estate bubble in 2008, but nothing gets past the labor market. The labor market is robust because it does not matter where the recession is generated; once a downturn occurs, companies will cut jobs, and unemployment will rise. This is why overall employment is one of the best trackers of whether GDP is growing or not.

Civilian Labor Force

Economic growth can come from several factors, increasing the workforce. This is the dynamic behind Say’s Law, which states that supply creates demand. The more our workforce increases, the more income generated and the more goods produced. This dynamic seems to hold when times are good but does not hold when times are bad and deflation sets in. Keynes’s contribution highlighted the need to support demand when confidence is low.

Unemployment Rate

The BLS puts together six different data sets for unemployment:

  • U-1 Persons unemployed 15 weeks or longer.
  • U-2 Job losers and persons who completed temporary jobs.
  • U-3 Total unemployed
  • U-4 discouraged workers + U-3
  • U-5 all other persons marginally attached + U-4
  • U-6 employed part-time for economic reasoning + U-5

When you hear the unemployment rate on the news, they primarily talk about U-3. Our analysis will look at U-3 and U6 because they are the most helpful and cited measures. The U-6 measure of unemployment accounts for the marginally attached and part-time workers. The difference between the U-3 (headline unemployment rate) and the U-6 unemployment rate gives a fair idea of labor market slack.

Employment-Population Ratio

Some would argue, and I would agree, that unemployment alone does not paint the entire story. The unemployment rate does not indicate the number of people without employment; it shows only the number of people looking for work. Another way to look at the unemployment rate is with the employment-population ratio, which includes almost everyone in the calculation, making it more holistic.

Which measure is better, unemployment rate or employment-population ratio? The answer is a bit more gray. The unemployment rate tends to be more cyclical while the employment-population ratio shows a more long-term secular trend.

Monetary Policy and the Labor Market

The labor gap is my preferred method for linking the business cycle and labor market from a monetary policy perspective. The labor gap is the difference between the unemployment rate (U-3) and the natural unemployment rate. The natural unemployment rate is the rate consistent with full employment, the rate at which the economy can tread on a balanced growth path. Monetary authorities tend to look at this gap when assessing the need for further monetary policy action to bridge the hole, making the labor gap a monetary policy tool for gauging employment slack. There is little slack in employment when the labor gap is below 0, and wage inflation should rise. The labor gap helps us understand why the Fed raises rates when they do. They believe that inflation pressures become an issue when the gap is below zero.

Nonfarm Payroll

Nonfarm payrolls are the measure of the number of workers in the U.S. excluding farm workers and workers in a handful of other job classifications. This is measured by the Bureau of Labor Statistics (BLS), which surveys private and government entities throughout the U.S. about their payrolls. The BLS reports the nonfarm payroll numbers to the public on a monthly basis through the closely followed “Employment Situation” report.

Nonfarm payroll is one of our primary tools for forecasting our monthly GDP figures. A recession involves a suitably prolonged decline in production, jobs, incomes, and spending. We are making nonfarm payrolls a much watch from both labor and economic growth perspectives.

Leading Employment Indicators

Several indicators lead the employment data and will help identify the future direction of the labor market. However, it is essential to note that leading indicators are also noisy and sometimes give false signals in order. One way to combat this is to index the leading indicators together to smooth out the forward guidance.

  • Average Weekly Hours (Manufacturing)
  • Average Weekly Overtime (Manufacturing)
  • Part-time for Economic Reasons
  • Normally Part-time
  • Weekly Claims for Unemployment Insurance