The unemployment rate is falling really fast.
This morning, we learned it had declined to 6.6% — the 23rd-straight month without an increase. As Brooking’s and UMichigan’s Justin Wolfers observes, the rate has dropped 1.3% over the past year — an insane acceleration from 2012’s decline of just 0.3%.
“Only three other times in the past six decades has the unemployment rate fallen this far this fast: in the early 1950s, when growth averaged 6.7% per annum; in the late 1970s when GDP growth averaged 4.8%, and in the mid-1980s when growth averaged 5.2%,” said Gluskin Sheff’s David Rosenberg to the U.S. Senate Budget Committee earlier this week.
In those other three instances, growth was robust. This time around, he says, we should probably be concerned about what’s causing the plunge.
“Today we accomplished this feat with only 2.4% growth which is disturbing because it means that it is not taking much in the way of incremental economic activity to drain valuable resources out of the labour market,” Rosenberg continued.
Most economists attribute the decline in unemployment to the drop in the labour force participation rate (LFPR) — the measure of those employed or looking for work divided by the working-age population. And the drop in the LFPR has been due to a combination of ageing demographics and an expanding group of discouraged workers walking away from the job market.
Rosenberg added in his testimony that the patchwork of state and federal benefits program might be distorting the signal sent by the LFPR as it may be incentivizing some people to stay out of the labour market.
“One theory that deserves examination is that we may have an abundance of separate benefits programs that provide for the disenfranchised in a very piecemeal and inefficient manner that are also perhaps abused or overly relied upon by some, which may lead to a distortion of work incentives,” he said.
Still, if we get to the point where we have a shortage of labour, we could see wage growth surge, which in turn could stoke inflation and pressure corporate profit margins.
Everyone’s inclination will remain to keep an eye on these figures.
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