Behind a Record Unemployment Rate, Warning Signs for Job Growth

In September, the labor market had many of the signs of a booming economy. The unemployment rate broke a 49-year record by falling to 3.7%, while weekly jobless claims also surpassed a 49-year record by hitting 201,000. However, much less attention has been paid to the continued poor performance of two alternative metrics: the labor force participation rate and the employment-to-population ratio.

In September, prime-age labor force participation declined for a 2nd straight month, meaning that participation is actually at a lower level today than in December 2017 (and at the same level as in September 2017). Furthermore, the prime-age employment-to-population ratio remained the same this month after a decline in August, and it is now at the same level that it was in February 2018.

What are we to make of the conflicting stories offered by these metrics? Importantly, the unemployment rate and jobless claims ignore workers who are outside of the labor force, while the labor force participation rate doesn’t take into account those workers inside the labor force. The employment-to-population rate, by contrast, includes workers both inside and outside of the labor force, and is thus the most complete metric to use.

Behind a record-breaking unemployment rate, therefore, a better metric of the labor market (the prime age employment-population rate) shows job growth that has declined in recent months, and has shown no improvement since February. This is especially important because since January, the Trump administration has undertaken an enormous fiscal stimulus program unprecedented in the post-WW2 era. The fact that this stimulus has achieved essentially no progress in the labor market suggests warning signs for job growth going forward.

The most likely explanation for this slowing of job growth in the midst of significant stimulus is that the US labor market is currently at full employment, and was there in late 2017. This represents a searing indictment of the dishonesty of the Trump administration, which sold its tax cuts as necessary to jumpstart a weak economy. Not only have they not done so, but the job market in December was close to as strong as it is today.