Unemployment’s Deception | May 3, 2019

Unemployment fell to an amazing 3.6%, a level last seen in 1970! The markets lauded the achievement with a strong advance on Friday. So, what is the deception?

Wage growth

Wage growth is an issue that plagues our current employment data. Traditionally, when we reach ‘full employment’ (typically around 4%) wages grow. This will happen for a few reasons.

  • It becomes harder for employers to retain talent. Employees start searching elsewhere and employers have to start giving bigger raises to keep good employees.
  • Employers searching from an empty employee pool. This leaves them to increase their salary offers, while qualified employees would have multiple options at their doorstep.

All that said, wage growth appears to have stagnated at 3.2% annually. It seems like a reasonable amount, but it is also an amount that prevents inflation from doing what it is supposed to do at this stage of the economy.

Participation Rate

The participation rate is the percentage of working-age people either working or looking for work; people who are no longer searching would be excluded. Are you asleep yet? This measure fell from 63% to 62.8% in April. So, the unemployment rate while falling by .2% was contributed to by participation that fell by .2%. Something that has naturally been happening over the last decade as the Baby Boomer generation retires.


It was not all bad news! Initial jobless claims were down all month, with several weeks under 200K. This is territory not seen in a long time. Additionally, non-farm payrolls grew a robust 263K.

Take the good news with a grain of salt though! Given the stage of the expansion, strong labor statistics should lead to inflation, rate hikes, and the end of a cycle. While data within the jobs report can be used as a leading indicator, the unemployment rate is a lagging indicator. It tells us where we have been, not where we are going.


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