The Falling Unemployment Rate Belies The Fundamental Shift In The US labour Market

John SilviaJohn Silvia

It’s jobs week in America.  On Friday, the Bureau of labour Statistics will be releasing its March Employment Situation Report.

Economists expect the report to show that U.S. companies added 199k new jobs during the month.

Wells Fargo economist John Silvia expects the number to beat expectations and come in at 221k, bringing the unemployment rate down to 7.6 per cent.

“We expect payroll growth to continue and anticipate sustained average monthly payroll growth in the 200,000 range by the end of the year,” he wrote in a new research note.

But don’t get too encouraged by his short-term optimism.

While Silvia expects GDP to return to trend growth and the unemployment rate to revert to a 6.4 per cent level, he believes that the U-6 unemployment rate is now doomed to stay much higher than we’ve seen in the past.

U-6 is a broader measure of unemployment that also considers those who are working part-time out of necessity because they are unable to secure a full-time job.

From Silvia:

Despite the persistently high unemployment rate, the U-3 unemployment rate, the benchmark unemployment rate, shows a mean-reverting tendency around 6.37 per cent—surprisingly close to the Fed’s guidepost of 6.5 per cent. However, our view for many years has been that the labour market of the 21st century is behaving in a way that is different from prior years. In that sense, the U-6 measure of unemployment, which captures the position of the broader labour market, shows evidence of a fundamental shift in the unemployment rate. It appears that the long-run mean of the U-6 unemployment rate is rising, suggesting that there is a growing part-time character to the labour market and less attachment to the traditional model of the full-time job.

Here are the two charts Silvia included in his report:

unemployment rates

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