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More jobs reports like this, please

By September 2, 2022 No Comments

The August jobs report contains some good news on an important front: more people returned to the work force. This is a key detail that the Fed has been watching very closely. More people returning to the work force would add a greater pool of available workers for hire. This increases competition for job openings which is something that could help bring down inflation.

Looking at the numbers

The labor force participation rate is the amount of people who are currently employed or actively seeking employment. An unemployed person who is not actively looking for a job is not counted in the participation rate. Pre-covid, the participation rate stood at 63.4% and was trending up. After plummeting during the depths of the pandemic, the participation rate’s rebound stalled out at 62.4% in March of this year. But in August, the rate rose to 62.4% from 62.1% in July:

This rise from 62.1% in July to 62.4% in August represents 786,000 new workers participating in the labor force:

Meanwhile, the unemployment rate rose from 3.5% in July to 3.7% in August. An increase from 5.67 million unemployed people to 6.014 million. That’s an increase in the number of unemployed persons by 344,000.

But remember, 786,000 new workers entered the work force, and only 315,000 of them found jobs. This leaves 471,000 new workers who are officially counted in the labor force participation rate, but who did not find jobs. Thus, these people are also officially counted as unemployed (because they are actively seeking work).

Therefore, because there were more entrants into the work force who did not find work then there were newly unemployed people (471,000 vs 344,000), we could surmise that 100% of the uptick in the unemployment rate was a result of an increase in the labor force participation rate.

Why does this matter?

The Fed itself has stated that one of their primary challenges to reducing inflation is encouraging a small rise in the unemployment rate without job losses. The following snapshots are from Jay Powell’s press conference transcript in June (highlights my own):

The line that stands out most is the Fed’s desire to see the labor market return to what, “we had before the pandemic.”

Before the pandemic, unemployment was still very low, like it is now. The difference is the labor force participation rate was much higher, at 63.4% in February 2020 vs 62.4% today. In order to get back to that 63.4% rate, 2.7 million new people need to join the work force.

While that won’t happen overnight, the August jobs report was a step in the right direction. 786,000 people joined the work force in August. Four more months like that, and the participation rate will be back over 63%.

If the participation rate doesn’t budge and the unemployment rate ticks up, that would be a sign that we are seeing net job losses in the economy. We don’t want that. A desirable outcome for the Fed, and investors, is that we get more job reports like this one.

The implication on wages and inflation

One of the stated goals the Fed has communicated to the market is wanting to see less upward pressure on wages. The Fed believes there’s a wage imbalance right now that is making their fight against inflation harder. In June, Jay Powell was asked if bringing inflation down will require, “some pain?” His response, in part, is shown below (highlights my own):

Here, Powell specifically cites a desire to see more competition for open jobs. The Fed believes such competition will relieve some of the upward pressure on wages. An increase in the labor force participation rate will help. More people looking for jobs, so that the ratio of open jobs to applicants returns to a “more normal level,” is something the Fed wants to see.

At a basic level, the Fed believes an increase in labor force participation will help them in their fight against inflation in two ways:

  1. A greater pool of available workers will lessen the imbalance in wage negotiating, which will ease fears over a wage-price spiral.
  2. More workers should equal more production. And more production of goods can help reverse inflationary pressures in various product categories.

A piece of the puzzle

The August jobs report, and future ones, is just one data set of many that the Fed will be examining when forming decisions on monetary policy. At face value, the August report was encouraging. Yes, the unemployment rate rose. Arguably though, that’s only because more people entered the work force who weren’t previously looking for work. A further increase in this labor force participation rate, which then results in a small uptick in the unemployment rate, would be somewhat of a best-case scenario for the Fed and investors.

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