Do We Even Have An Unemployment Problem?


Posted in: Economics, General, Stock Market, Thought of the Week

Last week’s Thought of the Week criticized the Fed’s use of Quantitative Easing (QE) to try to repair the structural issues in unemployment in our country. Our Investment Committee’s argument was that the Fed lacked the necessary tools to fix the real issues that affect those individuals who have been out of work for more than six months. However, our Investment Committee also believes that unemployment is not as bad as the Fed has declared.

Long-term unemployment is currently at 2.5%, which is well above its average of 1%. Despite that, our Investment Committee believes that long-term unemployment has little effect on our economy for three reasons:

  1. They Can’t Keep a Job: The data indicates that the long-term unemployed not only have a hard time finding a job but also keeping a job. Many workers end up unemployed within months of landing a new job for a variety of reasons (personality, poorly trained, etc.).
  2. Most Won’t Leave Their Field: Long-term unemployed appear to be unwilling to make big career changes and tend to prefer to search for employment in the fields that they know best.
  3. Retirement: Long-term unemployed typically end up leaving the workforce, and the most common reason is because they no longer want a job, suggesting the decision is permanent.

The long-term unemployed have little effect on our economy because they do not force upward pressure on wages. Demand for their skills is generally low and they must often decide whether to “take it or leave it” from prospective employers.

Short-term unemployment is currently at 4.2%, which is well below its historical average of 4.8%. Our Investment Committee believes this is a more accurate measure of our labor market for two key reasons:

  1. There Aren’t Many Out There: Short-term unemployment currently represents 63% of all unemployed, which is far below the historical average of 84%. This means that the supply of available labor is lower than normal, and those who are short-term unemployed are finding work rather quickly.
  2. Demand is High for the Highly Skilled: The unemployment rate for those with a college degree or better is 3.8% vs. 12% for those without one. In other words, companies are desperate for talent as our economy continues to improve.

 

To sum it up, skilled employees are finding jobs quickly, and companies are now realizing that in order to attract talent and keep them, they must become more competitive in compensation. Additionally, our strengthening labor market is driving wages higher for those individuals who spend the most money in our economy.  Our Investment Committee disagrees that total unemployment gives an accurate representation of the labor market because only the short-term unemployed are able to push wages higher.

Read this week’s Thought of the Week to learn more about  the effect of unemployment on our economy.

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As an Investment Advisory Representative working in conjunction with Global Financial Private Capital (GFPC) we are provided weekly thoughts on what is happening in the economy and the market. Written by our investment committee at GFPC we find these thoughts to be informative and interesting.