- The US unemployment rate currently sits at just 3.7%, the lowest level since late 1969.
- Whether measured by total number or as a percentage of the entire workforce, job openings currently sit at the highest level on record.
- With demand for workers high but supply short, it points to not only the likelihood of faster wage increases but even lower levels of unemployment.
The US labour market is running so hot that firms are quickly running out of available workers, pointing to the likelihood that unemployment could call a whole lot further in the current economic cycle.
Just take a look the chart below from Tom Porcelli, Chief US Economist at RBC Capital Markets.
It’s known as the Beveridge Curve, a chart that looks at the relationship between unemployment and the level of job vacancies as a percentage of the total labour force.
Not only did the number of total number of US job vacancies lift to a record high of 7.136 million in August, according to the Bureau of Labour Statistics Job Openings and Labor Turnover Survey (JOLTS), but they also hit record highs as a percentage of the entire US workforce.
An unprecedented level of openings, whether in numeric terms or as a proportion of the labour force.
It’s little wonder the US unemployment rate now sits at just 3.7%, a level not seen since late 1969.
And given the next chart below, also from Porcelli, suggests unemployment could be about to get a whole lot lower.
It overlays the US unemployment rate against job vacancies as a percentage of the US workforce. The scale for the latter has been inverted.
Clearly, with so many openings available and so little available workers to fill them, it suggests that labour market conditions are incredibly tight.
Demand for workers is high but supply is short, pointing to not only the likelihood of faster wage increases but also even lower levels of unemployment.
“At the current rate of openings, if the Beveridge curve were to normalise back to the prior cycle relationship with the unemployment rate, it would not be out of line to see a 2-handle on unemployment,” Porcelli says.
An unemployment rate of less than 3%, in other words, a level that could potentially lead to a sharp lift in worker wages, inflation and even faster rate hikes from the Fed.
Given the current trends, Porcelli says something’s got to give in order to avoid such a scenario from occurring.
“This imbalance needs to be resolved,” he says.
“There is a practical way to restore some balance here — continue to pull folks from the sidelines.”
Despite the best job prospects in decades, perhaps ever, labour force participation — the proportion of working age population either in or seeking work — currently sits at 62.7%, around the same levels seen over the past two years and some five percentage points below the peaks seen at the turn of the millennium
The so-called prime working age participation rate – those aged between 25 to 54 — is considerably higher than broader measure at 82%, although that too remains some three percentage points lower than where it sat just before the global financial crisis.
Porcelli says it’s the 18% of this cohort not participating in the workforce that needs to be drawn back from the sidelines.
With most who are immediately finding work, the signs at present are promising.
“The number of people not in the labor force for the prime working age cohort continues to fall. And those folks are falling back into the
labor force are [largely] flowing directly into the ranks of the employed, rather than the typical first step of re-entering the labor force unemployed,” he says.
“This is nothing short of impressive.”
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