A quick look at a timely topic of interest - with a brief review of why it could matter to investors.

Chart of the Week

August 11, 2014

That's the slack, Jack! (Or is it?)
US unemployment rate and labor force participation rate


Source: Bloomberg, as of 8/1/14. Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

The Bottom Line:

  • How much real slack is there in the US labor force?
  • Why it matters: employment is a prime concern of the Federal Reserve (Fed), which takes wages into account in making decisions about interest rates – since wage levels have a significant impact on inflation.
  • The Fed has signaled that it still sees signifcant slack in the labor market, and has explicitly stated it will be cautious about moving rates sharply—even if labor markets tighten more than forecast.
  • At first glance, the decline in the unemployment rate from 10% in October 2009 to 6.2% in July 2014 suggests that labor markets have already tightened significantly.
  • However, the decline in the unemployment rate since mid-July 2010 is more a statistical by-product of a simultaneous drop in the labor force participation rate rather than a boom in the number of jobs.  So the unemployment figure may not be capturing a true picture of the health of the labor market.
  • Meanwhile, the labor force participation rate, currently at 62.9%, suggests there's still considerable slack — a large pool of available labor.
  • In principle, the participation rate should rise in response to increased demand for workers, with potential workers re-entering the labor market as jobs become more plentiful. 
  • But that assumes a sizable "reserve" of employees who could return to the labor force. And there are several factors in place that could diminish that reserve relative to the past: the gathering wave of baby boomer retirements, a sharp increase in permanent disability recipients, and the continuation of a pre-recession trend of young people delaying entry into the labor force.  
  • If a decline in labor market slack were to drive up the cost of labor, one possible outcome could be nervous investors second-guessing the Fed, resulting in higher bond market volatility.  
  • That kind of environment can create opportunities for attentive fixed-income investors, including active managers that seek advantage through tactical shifts in duration, curve positioning and sector allocations.

The Chart:

  • The chart shows the labor force participation rate and the unemployment rate for the past ten years.
  • In July 2014, the labor force participation rate was 62.9%, down from 66% when the recession began in December 2007; and down from a peak of 67.3% in April 2000.
  • The unemployment rate was 6.2% in July 2014, down significantly from a peak of 10% in October 2009, but still above the most recent low of 4.4% in May 2007, a few months before the recession began.

Context & Perspective:

  • The relationship between the unemployment rate and the labor force participation rate during this cycle might provide important insight about overall economic growth and why the Fed does not appear too worried about inflation right now.
  • The decline in the unemployment rate from 10% in October 2009 to 6.2% in July 2014 coincided with a decline in the labor force participation rate from 65% to 62.9%.  
  • Comparatively, the last time unemployment fell from double-digit levels was during the early 1980s. From a peak of 10.8% in December 1982, the unemployment rate declined to 6% over the following five years, but it did so alongside a rising labor force participation rate (from roughly 64% to 65.7%).
  • The net difference in terms of jobs created: 15 million new jobs were created between December 1982 and December 1987 compared with just 9 million new jobs between October 2009 and July 2014.
  • The addition of six million working consumers in today’s economy would likely have a notable impact on the rate of growth.


The labor force participation rate is the labor force as a percent of the civilian noninstitutional population. The labor force includes all persons classified as employed or unemployed. The civilian noninstitutional population is all persons 16 years of age and older residing in the 50 States and the District of Columbia who are not inmates of institutions (for example, penal and mental facilities, homes for the aged), and who are not on active duty in the Armed Forces.

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