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What hides behind the record low unemployment rate in the US?


I guess as any person interested in politics or just in what is going on in the world, I follow the 46th President of the United State, President Biden of course, on Twitter. In the past 24 hours President Biden has written two tweets (please see below) on the US unemployment rate, which has reached 3.5% - "the lowest unemployment rate in half a century" (Biden). So, let me explain my understanding of this number.

Source: President Biden Twitter Account, 27/01/2021

First, let me state the obvious the 3.5% unemployment rate is a great news - in the US when people have a job they almost always have sufficient wages to leave a decent life.

I like saying that a very low unemployment rate is great because this is something you might forget when stuck in solving your labor market equations. Indeed, economists often refer to the "natural unemployment rate" - i. e. the unemployment rate in an efficient economy (an economy that produces the natural level of output). In addition, I have heard several economics commenting the recent labour market data as "bad news". From a computational point this makes sense, but we should always keep in mind that there should never be such thing as an optimally unemployed person - someone that is looking for a job and does not find one is often a terrible thing.

Nevertheless, one should be aware of the strong inflationary pressure that a low unemployment rate represents. Indeed, when unemployment is low workers have a strong bargaining power, forcing employers to raise salaries. In addition, the wages are known to never go back once they have increased, so this leads to an irreversible increase in prices. Today, the US labor market might be one of the most worrying factors for the FED - as people are sometimes paid to show up for interviews (2 vacancies per job seekers).

To come back, to our topic of what this unemployment rate really means:

Behind the unemployment number hides a significant decrease in the US participation rate. For example, if the labor force participation rate had remained the same as before COVID, 2.6 million more Americans would be looking for a job.

Note that the participation rate is the labor force (i. e. the people that have a job or a looking for a job/ the employed and unemployed people) divided by the total working-age population. Also, note that the people included in these categories vary across countries.

These differences raise questions about how several metrics are calculated in the labor market.

For example, although this changes across countries, the unemployment rate is often criticised for only including people with no job at all and considering employed people with part-time jobs. The significant movements of people from one category to another and especially from the labor force to out of the labor force (see graph) might also prove the weaknesses of these categories. Hence, in my opinion there are surely more than 3.5% of the US potential workers who would like to work and who do not have a job.

This declining participation rate brings other questions: Where did these people go? Why did they leave the labour force? and, maybe more importantly, What would bring them back in the labour force? I am sure that more research will be dedicated to these issues.

To conclude, as with any economic variable, we must be cautious about what it really tells us. Here, the very low and declining unemployment rate means either that more people who want to work have a job (part-time included) or that more people have given up looking for a job? (I believe a bit of both).

Lastly, this might be representative of a new problem that our economy will be facing: a shift from too-low aggregate demand to too-low aggregate supply.


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