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The Unemployment Rate: What Do the Numbers Really Mean?

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 and others are not, why some companies are hiring and others are laying off their staff. It explains why consumers make their purchasing choices. It even explains why people live where they live and how they use their free-time. In a nutshell, the study of economics is one of many lenses you can look through to understand human behavior as it relates to how we use our resources.

Because of this, it’s good to know a few things about it. Today we are going to discuss those jobs numbers you hear or read about in the news. The unemployment rate sounds pretty basic, but there are a lot of factors that lead into it and also a lot of things a majority of us don’t know about the 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 who has a temporary job, part-time job, or full-time job are considered employed, as are people who perform at least 15 hours of unpaid family work.

There are a few things to note in this definition. For one, there are quite a few people who are not considered unemployed due to their personal circumstance. Take for instance, retirees who are no longer working and individuals who are either physically or mentally unable to work. Additionally, in the definition it mentioned, “have actively sought work within the last four weeks.” In other words, this statistic does not include people who have become so frustrated that they have given up seeking employment altogether.

Based on the Bureau of Labor Statistics June 2017 report, unemployment has continued its march down to 4.4% nationally. Anything below 5.0% is generally considered “full employment.” A lot of people hear this and are cheered by what they consider a booming economy. However, when considering the caveats on who is counted in the measurement, it isn’t the full story.

While the unemployment rate is what gets the headlines, what doesn’t get much coverage is the labor force participation rate, which is the percentage of the population who are actually working. Being the logical person you are, you are probably thinking, “Since the unemployment rate is going down, then the labor force participation rate must be going up.” That makes sense. But you would be incorrect. In fact, the U.S. labor force participation rate has been declining since 2000, where it was at its peak of 67.3% and took a sharp drop at the time of the last recession and then steadied just a couple years ago. It is 62.8% as of June 2017.

Ah, but the Baby Boomers are hitting retirement. That must explain it! Well, actually no. In fact, according to a Pew Research Center analysis done last year, since 2000, the number of people in retirement age who are still working has increased significantly, from 12.8% to 18.8%. Given that life expectancy continues to go up, retirement savings for many were wiped out from the recession, inflation increases continue to eat away at their savings, and many people in retirement age have the general desire to remain active, this figure isn’t shocking. But it does still leave the question as to why the labor force participation rate remains so low compared to what it was just a handful of years ago.

One of the leading contributors is the declining demand for unskilled labor. A study done by the Department of Labor noted that our economy has shifted and with this shift, the needs in labor have changed to more skilled labor. Those who couldn’t go to college or get specialized skills have been clobbered. Unfortunately, this is especially true for young minorities who have the largest percentage of people exiting the workforce. On top of the lack of significant skills, which by itself makes it tougher to get a job, recent minimum wage laws are also decreasing the demand for these roles.

study done in Seattle after the second wave of minimum wage increases went into effect shows that after increasing the city’s minimum wage from $11/hour to $13/hour, there was a 9% decrease in total hours worked for those earning below $19/hour and an average payroll loss of $125 per month per job. At this juncture of the minimum wage experiment in Seattle, job losses haven’t been excessive, although there was a slight increase. Employers seem to be finding other ways to reduce labor costs, but after another $2/hour increase to bring it up to $15/hour next year, one would assume more job losses will occur either through reductions in workforce or businesses closing operations in the city.

So, remember when we said that the unemployment rate does not account for people who have given up on finding a job? The unskilled workers, who used to have plentiful opportunities decades ago, have found these opportunities dry up. These are the uncounted. They aren’t “unemployed” according the government, but they sure as heck aren’t “employed” either. What the official unemployment rate is really measuring, are the people who are out of work, but have decent prospects due to their education, experience, and skill-set.

Unemployment vs Under-Employment

The other criticism of the official unemployment rate is that it does not differentiate between part-time and full-time employment. A part-time employee could work as little as 5 hours per week and still be counted the same way as a full-time employee who works 50 hours per week.

Unfortunately, this is becoming a greater statistical problem recently due to the rather large number of part-time employees. Since the recession 10 years ago, it’s been much higher than historical averages. In the last year, it has been trending down, but is still higher than it ought be. Some of this could be attributed to the growing number of people of retirement age who are still working (as discussed earlier), but on a part-time basis. But much of it is also attributed to the reduction of full-time jobs since the recession. Many people who may have been working one full-time job earlier are now having to settle for part-time or multiple part-time jobs.

Similarly, the unemployment rate doesn’t consider wage differentials. One of the things that has dogged the economy ever since unemployment rates have declined is that wages have been stagnant, growing slower than inflation. Usually, when labor becomes scarce (aka, low unemployment), the competition for the labor goes up – and with increased competition, wages increase. So why isn’t this happening?

One possible reason is that because of the higher than normal number of part-time jobs, which are generally lower paying, wage averages overall have been negatively impacted. Another leading theory is that employers have learned how to make do with fewer full-time workers, keeping the demand in check. So instead of wages skyrocketing, they’ve been going sideways for several years.

The Factors in Today’s Economy on Unemployment

As we can see already, there are a lot of things at play in the labor market. Too many to count really. But what we’ve talked about so far is just the tip of the ice berg. There are other factors that aren’t generally thought about that we want to briefly mention.

When the recession hit the country in 2007, companies had to shed jobs to stay afloat. Because the recession was the longest one we’ve experienced since World War II, businesses had a long time to learn how to make do with less. They discovered that one person could, in some cases, do the work of two. Unfortunately, this means that the number of full-time jobs is struggling to get back to pre-recession numbers. Recent data is encouraging, however. The number of full-time workers has been increasing while the number of part-timers has been going down. If the trends continues, eventually wages should rise.

Employers that are looking to hire new people, must weigh the costs and benefits of adding them. Beyond the salary, employers are required to pay approximately 10% more to cover for federal and state unemployment insurance, Medicare, Social Security, and worker’s compensation insurance. Then there is the added cost of health benefits, paid time off benefits, training the employee, creating a work-space, providing equipment, and so forth. It all adds up quickly. If the benefit of having the additional person isn’t bigger than the costs associated with this hire, then math alone prevents the job opening from ever existing.

Employers also need some reason to believe that their business will grow in the future before taking any chances on adding more people. Confidence like this can only come if business leaders see positive and growing demand in their industry and the economy at large. Business leaders also desire stability and predictability. They need pro-growth laws and regulations that won’t be too significant of a burden. Businesses hate uncertainty.

The signs moving forward look positive. That said, the labor market is still in a relatively fragile state today. Anything that could potentially cause headwinds for a business will likely be detrimental to its workers. Only time will tell if the country has finally found its footing. We all hope it has, but we should be prepared if it hasn’t.

What This Means to You

Now, more than ever, you need to be able to show what value you are going to bring to an employer to justify the costs associated in hiring you. Why? Because you’re facing a lot of competition. If you are working a lower paying full-time job and vying for something better, you’re up against all your counter-part full-time employees along with part-time employees who are seeking full-time employment. If you’re a lower-skilled worker, you are facing the unenviable situation of fewer jobs available with a high supply of workers available.

How can you show your value?

  1. Look for opportunities to develop new, in demand, skills. The great part about the world we live in today is that learning opportunities are at your fingertips. There are websites devoted to just this: Skillshare, Udemy, and are all excellent sources that allow you to learn from the masters in their trade on your time and at your pace. You also have a library full of free books you can read. Use it!
  2. Demonstrate in your resume and cover letter how your strengths, skills, and experience are what the employer needs. First you should research the business to know what the employer’s needs are and then you have to address each one by showing how you can take care of those needs.
  3. Network as much as possible. A survey done by LinkedIn last year found that 85% of all jobs are filled by networking. Just looking at job boards is tempting because it’s easy. You don’t even have to get out of your pajamas, which is a huge selling point. But it’s a loser’s strategy, ultimately.
  4. Refine your interview skills through practice. You may look stellar on paper, but if you can’t sell yourself in person, the resume is about as worthless as the paper you printed it on. Interviews can be extremely nerve-wracking, especially when your livelihood is on the line, but with repeated practice and preparation, anyone can make a great impression.
  5. Be comfortable negotiating. Don’t be part of the underpaid employee statistic. Learn what your market value is and how to get the employer to pay you what your actually worth.

If you are unemployed or under-employed, RockIt Career Consultation Services can help you get back on your feet and get hired for the job or career you want. Review all our affordable services we have available for you to take advantage of and sign up for a free initial consultation today!