Employment Statistics Explained
Hello, it’s Bradley, Marci’s older son again (with a little light editing from my aunt and mom). All the differing definitions of “jobs in this country” among the Presidential candidates interest me, so I looked at the statistics, what they mean and why we care.
At regular intervals, the US Department of Labor releases data about the nation’s labor market. This evidence is used along with other information to measure the strength of the economy. Below, I’ll define the terms that you’ll probably read in the newspaper and then I will do the hard part – try to explain why any of this actually matters to individual investors like us.
Labor Force: The labor force is defined as all people working or looking for work. The Labor Force Participation Rate is then simply the percentage of people in the United States who are in the labor force (excludes children, retirees, and so-called “discouraged workers” who have given up looking for work). A high labor force participation rate is generally linked to a strong jobs environment, because discouraged workers will re-enter the labor force if they believe they will be able to get a job. Sometimes, if the labor force participation rate increases due to discouraged workers re-entering the labor force, the unemployment rate will increase a bit due to more people counted as unemployed until they actually find jobs.
Unemployment Rate: This is probably the most commonly quoted statistic by both media and politicians. The unemployment rate is the percentage of people in the labor force (defined above) who do not have a job. The reason why the unemployment rate is important is because when most people have jobs, they will buy things, and this requires the production of more things, which creates more jobs, and so on in a virtuous cycle. Economists often talk about something called the “Natural” rate of unemployment, also called “Full” employment, which is the rate at which essentially everyone who wants a job has one. Most economists believe that the natural rate of unemployment is around 4-5% (meaning that the current unemployment rate of 3.7% is full employment).
Non-farm Payrolls/New Jobs: One of the most anticipated monthly reports is the new jobs report. Obviously, the more jobs created, the better. In a growing economy, jobs are created every month. In order for the unemployment rate to decrease, the economy generally needs to create at least 150,000 jobs per month. It’s also worth noting that the initial estimates from the Bureau of Labor Statistics are often way off month to month and can change by hundreds of thousands of jobs in “revised” estimates.
New Jobless Claims: The Department of Labor releases weekly reports of how many new workers have filed for unemployment benefits in the past week (the rest of the reports are released monthly). This is a reasonably good leading indicator of the behavior of the labor market.
As you can see, there are always enough different (and conflicting) statistics for pundits (and politicians) to tell whatever story they want about the economy. As investors, these statistics are important because they are among the major factors that the Federal Reserve takes into account when determining short-term interest rates. These short-term interest rates obviously impact bond pricing, but they also have a very significant impact on the equity market due to the corporate cost of borrowing for business operations or expansion.
As we’ve seen over the last six months or so, the different and conflicting statistics, (along with Presidential tweets) are making the Fed Reserve job more challenging as well but that’s a Blog post for a different day.