Jobs, Jobs, Jobs

How tight is the labor market?

Photo: Douglas Tengdin

After hitting 10% in October of 2009, unemployment has fallen to 5.3%. That’s pretty good. But there are still areas where the job market feels week—especially in long-term unemployment. Folks unemployed 6 months or more currently make up a quarter of the unemployed. That ratio has come down from almost 50% in 2010, but it’s still pretty high. That’s one reason why this recovery doesn’t feel very strong.

Another reason is the participation rate—the percent of the US population either working or looking for work. That number peaked in 2000 at just above 67%. It had risen pretty steadily until then. But it started falling after the dot-com bust, and continued to fall after the last recession. It’s currently down almost 5% from its peak to 62.6%, a level not seen since the late ‘70s.

Source: Alan Krueger and Princeton University

Still, 5.3% unemployment is pretty low. Conventional wisdom says that as the economy strengthens, people not in the labor force will start looking for work and push the unemployment rate higher, but there’s little evidence that this is happening. The rate at which people move from outside to inside the labor force has been pretty stable, between 7 and 8%. In fact, it recently slowed to just below 7%.

The best measure for tightness in the job market is compensation. When workers are scarce, employers have to pay up—both to attract new workers, and to hold onto the staff they have. And by this measure, things are getting better. During the ‘90s, real wages and salaries—after inflation—gradually increased. That’s part of the reason stocks got so bubbly at that time. We had a sense that things were getting better and better. But pay raises were harder to come by after the dot-come bust, and real wages and salaries actually fell in the shadow of the financial crisis. Gloom in the stock market was matched by gloom in the labor market.

Source: Alan Krueger and Princeton University

But lately, pay raises have perked up. Real salaries and wages rose 1½% last quarter, the biggest increase in over a decade. Indeed, with unemployment so low and real compensation rising so much, there’s some risk that wages will rise fast enough to squeeze profits. Among other issues, this has the market worried.

How tight is the labor market? If pay is any indication, it’s getting tighter.

Douglas R. Tengdin, CFA

Chief Investment Officer

By |2017-07-17T12:22:41+00:00July 27th, 2015|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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