Economics: What a Snooze-Fest, Right?
Unfortunately, the national and local economy plays a huge role in our lives, whether we like it or not. It explains why some people are working while others are not, why some companies are hiring while others are laying off staff, and even why consumers make the purchasing choices they do. It even impacts where people live and how they spend their free time. In a nutshell, the study of economics provides a unique lens through which we can understand human behavior and how we use resources.
Because of this, it’s helpful to understand a few key concepts. Today, let’s talk about those job numbers you hear or read about in the news. The unemployment rate sounds pretty straightforward, but there are many factors that contribute to it, along with plenty of things most of us don’t know about this figure.
Unemployment vs. Labor Participation
The official unemployment rate defines unemployed people as those who are willing and available to work and have actively sought work within the last four weeks. Anyone with a temporary, part-time, or full-time job is considered employed, as are people who perform at least 15 hours of unpaid family work.
There are a few important things to note about this definition. For one, many people are not considered unemployed due to their personal circumstances. For instance, retirees who are no longer working, or individuals who are physically or mentally unable to work, are excluded. Additionally, the definition states that someone must have “actively sought work within the last four weeks.” This means that people who have become so frustrated that they’ve given up on their job search aren’t included in this measurement.
According to the Bureau of Labor Statistics’ June 2017 report, the unemployment rate continued its decline to 4.4% nationally. Anything below 5.0% is generally considered “full employment.” This often cheers people, as they think it signals a booming economy. However, when you consider the caveats regarding who’s counted, it’s not the full story.
While the unemployment rate grabs the headlines, the labor force participation rate (the percentage of the population that is actually working) doesn’t get much attention. You might think, “Since the unemployment rate is going down, the labor force participation rate must be going up,” but you’d be wrong. In fact, the U.S. labor force participation rate has been declining since 2000, when it peaked at 67.3%. It dropped sharply during the last recession and has only steadied around 62.8% as of June 2017.
But wait! The Baby Boomers are retiring, so that must explain it, right? Actually, no. According to a Pew Research Center analysis, since 2000, the percentage of people in retirement age who are still working has increased from 12.8% to 18.8%. With life expectancy rising, many retirees are finding their savings depleted by the recession, inflation, and ongoing living expenses, leading them to continue working. This figure isn’t surprising, but it still leaves the question: Why is the labor force participation rate still so low compared to just a few years ago?
One major reason is the declining demand for unskilled labor. A study by the Department of Labor noted that the economy has shifted, with more demand for skilled labor. Those who couldn’t attend college or gain specialized skills have suffered. This is especially true for young minorities, who have the largest percentage of people exiting the workforce. On top of the lack of skills, recent minimum wage laws are also decreasing demand for these roles.
A study done in Seattle after the second wave of minimum wage increases shows that when the city’s minimum wage rose from $11/hour to $13/hour, there was a 9% decrease in total hours worked for those earning below $19/hour, resulting in an average payroll loss of $125 per month per job. Though job losses have not been excessive yet, businesses are finding other ways to reduce labor costs. After another $2/hour increase bringing the minimum wage to $15/hour next year, more job losses are expected, either through workforce reductions or businesses closing in the city.
So, remember when we said the unemployment rate doesn’t account for people who have given up on finding work? These unskilled workers, who once had plentiful job opportunities, now find those opportunities drying up. They’re not counted in the official rate, but they certainly aren’t “employed” either. The official unemployment rate really measures those who are out of work but have decent prospects due to their education, experience, and skill set.
Unemployment vs. Under-Employment
Another critique of the official unemployment rate is that it doesn’t distinguish between part-time and full-time employment. A part-time employee could work as little as five hours a week and still be counted the same as a full-time employee working 50 hours a week.
This is becoming a bigger issue as the number of part-time employees has risen significantly since the recession. Although it has been trending downward in the past year, part-time employment remains higher than normal. Some of this can be attributed to older workers working part-time, but much of it is also due to the reduction of full-time jobs since the recession. Many individuals who once worked full-time are now settling for part-time or multiple part-time jobs.
Similarly, the unemployment rate doesn’t account for wage disparities. One persistent issue in the economy, despite the declining unemployment rate, is stagnant wages, which have been growing slower than inflation. Typically, when labor becomes scarce (i.e., during low unemployment), competition for workers increases, which should drive wages up. So, why isn’t this happening?
One possible reason is the high number of part-time jobs, which tend to pay less. Another theory is that employers have learned to make do with fewer full-time workers, keeping labor costs in check. So, instead of wages rising, they’ve remained relatively flat for years.
Factors Affecting Today’s Economy and Unemployment
As we’ve discussed, many factors are at play in the labor market. But this is just the tip of the iceberg. There are other less-discussed factors that also play a role.
During the 2007 recession, businesses had to lay off workers to survive. Because the recession lasted longer than any other since World War II, companies had time to learn how to make do with fewer employees. They discovered that one person could sometimes do the work of two. Unfortunately, this means the number of full-time jobs has struggled to rebound to pre-recession levels. However, recent data is encouraging: the number of full-time workers has been increasing while part-time workers have been declining. If this trend continues, we should see wage increases in the future.
Employers must also weigh the costs and benefits of hiring new employees. In addition to salaries, employers must pay about 10% more to cover federal and state unemployment insurance, Medicare, Social Security, and workers’ compensation. There are also costs related to health benefits, paid time off, employee training, and providing workspaces and equipment. If the benefit of adding a new employee doesn’t outweigh these costs, a job opening may never materialize.
Employers also need to feel confident about the future before they hire. They need to see positive demand in their industry and the broader economy and want stability in the form of pro-growth laws and regulations. Uncertainty can prevent businesses from taking on new hires.
The outlook is positive, but the labor market is still fragile. Anything that creates headwinds for businesses could negatively impact workers. Only time will tell if the economy has fully recovered, but we should be prepared for any outcome.
What This Means for You
Now more than ever, you need to prove the value you bring to an employer to justify the costs of hiring you. Why? Because you’re up against a lot of competition. If you’re working a lower-paying full-time job and seeking something better, you’re competing not only with other full-time employees but also with part-time workers who want full-time positions. If you’re a lower-skilled worker, you’re facing the challenge of fewer available jobs and a high supply of workers.
How can you show your value?
Develop new, in-demand skills. Learning opportunities are plentiful online through platforms like Skillshare, Udemy, and LinkedIn Learning. Take advantage of these resources to develop new skills at your own pace.
Tailor your resume and cover letter. Demonstrate how your strengths, skills, and experience align with the employer’s needs. Research the business to understand what they need, and show how you can fulfill those needs.
Network as much as possible. A LinkedIn survey found that 85% of all jobs are filled through networking. Job boards are convenient, but relying on them alone is a losing strategy.
Refine your interview skills. A great resume won’t help if you can’t sell yourself in person. Practice and preparation are key to making a strong impression in interviews.
Negotiate your salary. Don’t settle for being underpaid. Learn your market value and how to negotiate a salary that reflects what you’re truly worth.