The labor market is nowhere near as strong as it appears. If that sounds surprising, it’s because the absence of millions of Americans from the workforce artificially lowers the unemployment rate.
Accounting for the missing workers reveals an unemployment rate of over 6 percent, not the official 3.8 percent.
To make sense of the numbers, we need to understand what led to today’s labor market conditions. The two-month recession in 2020 wasn’t a normal downturn caused by bad investment, misallocation of capital, and/or overextension of credit. It was an artificial recession caused by the government forcibly shutting down a robust economy during COVID-19, ending a period of both fast growth and low inflation.
Tens of millions of Americans became unemployed in a span of two weeks. But when those artificial constraints were lifted, the labor market came back at the fastest rate ever and quickly was approaching its pre-pandemic trend. This is the opposite of a normal recession, where the labor market slowly accelerates into a recovery.
President Joe Biden inherited an economy that was growing at a $1.5 trillion annualized rate and was adding an average of 1.4 million jobs per month after the government-imposed shutdowns. At the same time, inflation was only 1.4 percent, below the Federal Reserve’s 2 percent target.
But Biden’s anti-growth, big-government agenda slammed the brakes on the economy and the labor market.
After just 18 months of the Biden administration, inflation soared to 40-year highs, and the economy contracted for two consecutive quarters. Average monthly job growth has slowed 70 percent, and America remains 4.6 million jobs below its pre-pandemic trend.
The Bureau of Labor Statistics’ survey of households contains even worse data, showing the number of Americans employed remains 5.5 million below its pre-pandemic trend. The survey also shows a depressed labor force participation rate and a shocking increase in the number of those not in the labor force, relative to February 2020.
Before the government-imposed lockdowns, the number not in the labor force was about 95 million and falling. Since June 2020, however, the level has been stuck around 100 million. That means millions of Americans left the labor market and still haven’t come back, which explains why the ratio of employment to the population also shows a gap of 4.5 million relative to its trend.
These millions of missing workers skew many of the statistics used to gauge the health of the labor market. Imagine a labor force of 100 people wherein 10 are unemployed, giving an unemployment rate of 10 percent. If one of those unemployed persons leaves the labor force, the unemployment rate drops to 9.1 percent (with 9 divided by 99).
No jobs were created, but the unemployment rate went down. That’s exactly what’s been happening in the real economy.
Accounting for the millions of people currently excluded from the labor market reveals an unemployment rate between 6.3 percent and 6.8 percent, much higher than the official 3.8 percent rate.
To further illustrate the point, over 700,000 Americans rejoined the labor force last month, in part because families are having trouble making ends meet. Less than a third of them were able to find work, and even fewer found full-time jobs. Yet despite the increase in employment, the unemployment rate rose because so many more people are finally being included in the official number of unemployed.
Yet there are even more indicators showing weakness in the labor market. The number of job openings has plummeted to below the pre-pandemic trend, indicating softening labor demand, which will put downward pressure on wage growth. At the same time, businesses are cutting hours and reducing the number of full-time employees.
As inflation continues to eat into family budgets and more households need a second income, additional people are reentering the labor market, all while businesses are hiring less. That will drive the official unemployment rate much higher and expose this shell game for what it is.