1 Frightening Fact About the Jobs Market

Nearly everywhere you look, you'll see signs of a booming U.S. economy. Both of the United States' iconic stock market indexes, the Dow Jones Industrial Average and S&P 500, have been regularly hitting new all-time highs. Housing prices are on the rise, the manufacturing sector is healthfully expanding, and, despite a setback compliments of Mother Nature, U.S. GDP has been on the incline.

The most visible indication that the worst recession in seven decades is ending may be the steadily falling U.S. unemployment rate. Although the unemployment rate ticked slightly higher in July, rising from 6.1% in June to 6.2% despite the addition of 209,000 jobs, the overall trend has been decisively lower since October 2009, when unemployment peaked at 10%.


U.S. unemployment percentage. Source: Bureau of Labor Statistics.

Historic unemployment rates have generally averaged between 4% and 6%, which is often considered the sweet spot for the U.S. economy. While an unemployment rate of zero would be nice, it's simply not practical because of the "natural rate of unemployment."

A concept developed by Milton Friedman and Edmund Phelps five decades ago, the natural rate of unemployment is merely the normal rate of unemployment that a healthy economy will achieve. Some level of unemployment is to be expected due to a number of factors. For example, there will always be a number of people changing jobs or waiting until they land the right job. It can also be increasingly difficult for companies to find qualified workers as the unemployment rate inches lower and the pool of qualified workers decreases.

So if you were to take the recent unemployment data at face value, you'd likely believe the jobs market is a well-oiled machine -- but that may be further from the truth than you realize.

Labor force smoke-and-mirrors
A number of factors have influenced the nearly 40% drop in the U.S. unemployment rate since October 2009. The primary catalyst is the precipitous drop in the labor force participation rate.

The labor force participation rate simply measures the number of working-age individuals who are either employed or unemployed and looking for a job. Generally speaking, we would normally see the labor force expanding in a healthy economy. However, there's been a large demographic shift under way for more than a decade due to the steady exit of baby boomers from the workforce. Those boomers, and even non-boomers, who have chosen to retire, go to college, or simply give up looking for work out of discouragement, no longer count in the Labor Department's monthly unemployment calculations.

What does this mean? Simply put, if you strictly look at total nonfarm payrolls in nominal terms, you'll note that total nonfarm payroll employment has expanded by less than 1 million since its previous peak in Jan. 2008 -- when the U.S. unemployment rate was just 5% -- through July 2014.


Total nonfarm payroll employment 2000-2014. Source: St. Louis Federal Reserve. 

But here's the really terrifying figure
However, I don't consider the lack of genuine job growth to be the most worrisome thing about the jobs market. In fact, my biggest concern is tied to those who are currently unemployed and seeking work.

Make no mistake about it: People who are employed and seeking work are having an easier time keeping their job relative to a few years ago. This has been demonstrated by the small rise in nominal nonfarm payroll employment and the dip in the unemployment rate. Yet the length of time that it takes job seekers to find work is absolutely staggering.


Mean duration of unemployment in weeks. Source: St. Louis Federal Reserve via Bureau of Labor Statistics. 

Spikes in the average duration of unemployment following a recession are common. As you can see from the chart above, every recession since 1948 has led to a sizable spike, in percentage terms, in the mean duration of unemployment. Often, the multiyear period between recessions gives this figure a chance to fall, indicating that unemployed people are spending less time trying to find work. You'll note that this has occurred even in the case of our latest recession, where the mean duration of unemployment dropped from a peak of more than 40 weeks in late 2011 to the latest reading of 32.4 weeks in July 2014.

But there are two particular aspects about the recent spike and subsequent dip that are scary.

First, no recession has seen such a tremendous surge in average length of unemployment in percentage terms than the Great Recession of 2007-2009. Between March 2008 and December 2011, the average period of time workers spent unemployed ballooned from 16.5 weeks to 40.7 weeks -- an increase of 147%. Few other recessions have produced an increase of more than 100% in the average length of unemployment. In fact, we have to go all the way back to 1953-1955 to find the last time this occurred: Mean duration of unemployment rose from 7.1 weeks in September 1953 to 14.3 weeks in April 1955.

The other worrisome fact is that mean duration of unemployment is falling at a much slower pace than it has following previous recessions. Historically, the average length of unemployment has typically recovered by 50% or more within five years of the end of a recession. For example, following the recession of 1981-1982, the average length of unemployment was actually lower five years after the end of the recession than it was the day the recession ended. In contrast, the recovery we've witnessed since the Great Recession ended in 2009 has been far slower. The average length of unemployment spiked by 24 weeks (from 16.5 weeks to 40.7 weeks), but the latest unemployment report shows that average unemployment length is still 32.4 weeks -- a decline in the recession-based spike of only one-third.

Why this could portend hard times ahead
The stubbornness of the mean duration of unemployment could have two unwelcome implications.

Source: Photologue_np via Flickr.

To begin with, those who remain unemployed at this very moment, despite the "expanding" labor force and shrinking unemployment rate, risk having a difficult time finding work in the future. As we noted earlier, as the unemployment rate shrinks, the pool of qualified labor also tends to shrink, which could make it much tougher for people without specialized skills to find work.

This is especially bad news because American citizens are abysmal savers. Unfortunately, when the U.S. economy is running on all cylinders, most people are spending to their hearts' content, only considering the idea of saving when we enter a recession. This backward thinking has left a large number of Americans without an ample emergency fund to weather a lengthy period of unemployment.

According to a June financial survey from Bankrate, slightly more than one-quarter of respondents have no emergency fund and are simply living from paycheck to paycheck, while 24% have stashed between one and three months' worth of emergency funds. This survey implies that half of the country would be in serious financial trouble if they were unemployed for a period of longer than 13 weeks. Right now, the average duration of unemployment is over 32 weeks!

Think about that and tell me how comfortable you feel about the current state of the jobs market.

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Read/Post Comments (13) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 10, 2014, at 7:07 PM, RHO1953 wrote:

    I don't know anyone who thinks the economy is improving. In fact, I don't know anyone who thinks any part of this country is better than it was six years ago, or the world for that matter. All I can see is a death spiral into oblivion.

  • Report this Comment On August 10, 2014, at 7:36 PM, HomerJFong wrote:

    This trend might be more sociological than economic. The internet age has provided recruiters and job seekers alike with myriad opinion pieces on how to get hired/hire effectively, etc. This has left many hiring managers trying to, frankly, outsmart (read: overthink) the hiring process by forming opinions on what makes for the best hire. What is pushing this number so high is probably the idea of "currently employed = good, long-term unemployed = bad". The long-term unemployed are looked at as being defective, which makes it harder for them to find work the longer they're out, thus pushing up this number. (Never mind that all of these modern 'philosophies' on hiring has made finding work a complicated minefield of do's and don'ts; a nuanced skill that many great potential hires will never master.) On the other hand, many jobs are going to the currently-employed and, because these people were never unemployed in the first place, don't count in this number. Every job that goes to someone currently employed is not going to someone that is unemployed, pushing up their length of unemployment. While there were some jobs lost in the recession that will never come back, a large part of this trend likely comes from how the unemployed are viewed by hiring managers.

  • Report this Comment On August 11, 2014, at 1:32 AM, segarolow4 wrote:

    Things are just getting worse!

    And the new crash is on the way.. And will be worse then the last one...

    We never got out the the last one. And a new one is on the way....

    The USA is a land fill now. And is about to become the new third world country..

  • Report this Comment On August 11, 2014, at 2:26 AM, quasimodo007 wrote:

    what is amazing the EVIL GoP congress has protected and helped their GREEDY MAFIA Privilege CROOKS of wall street w/ Huge Billions dollars TAX breaks while they Outsourced Union/Hourly US Jobs overseas to Mexico,Brazil,Canada,Viet Nam, China,Philippines to Export Slave Wages and Slave Labor While these Wall street Mafia Privilege Crooks are Stockpiling Over A Trillions Dollars in CASH RESERVES in oversea OFF SHORE Accounts Non Taxable w/the Help of the corrupt London FTSE Robber Bank Barons. Not willing to invest in the USA.

  • Report this Comment On August 11, 2014, at 2:27 AM, rickdri wrote:

    What about the other frightening fact that so many are working part time? We can expect even more companies to hire part time when Obama's ignorant illogical healthcare law forces the employer mandate! He knows what will happen so he illegally delayed the mandate for as long as he could! I just hope and pray that everyone sees what a mess we are in for after the mandate kicks in and vote out all of the goobers that voted this piece of crap law into existence!

  • Report this Comment On August 11, 2014, at 2:37 AM, rickdri wrote:

    To think that the republicans are the only ones to stock pile their money in over seas accounts while shipping jobs to overseas countries is ludicrous Quasimodo! Democrats are just as guilty of these actions as republicans. Don't you think that democrats can run companies too? Don't you think that they too will take every tax advantage they can find? Stop living in a dream world where the republicans are the only rich company owners and democrats aren't rich and don't know how to run a business! They are just as ruthless as anyone when it comes to running a business!

  • Report this Comment On August 11, 2014, at 7:13 AM, Mathman6577 wrote:

    I couldn't get past the first paragraph.

    The new definition of a "booming" economy:

    1. 11 million less people working than when Obama took the oath of office.

    2. Stagnant wages.

    3. GDP one trillion dollars less than it should be at this stage of a "normal" recovery.

    4. People being forced to work part-time or work 2 or 3 jobs.

    And note as even the founders of the Fool even wrote the stock market is not related to the general economy.

    The economy is far from booming. I would rewrite this and remove that first paragraph at least.

  • Report this Comment On August 11, 2014, at 11:24 AM, BackoffBugaloo wrote:

    They talk about unemployment going down, but they do NOT talk about what type of jobs are replacing the ones that left the country. In general, people are getting jobs that pay 50-75% less than the ones they left. Jobs may have no benefits, etc.

  • Report this Comment On August 11, 2014, at 12:17 PM, sabebrush6 wrote:

    The job market in our area is absolutely appalling. Very few jobs are available and those that are have 200 people in line applying for them. This is good ? Not !

    The other part of the job market is that a large majority of the jobs are part time. That = "0" benefits for the employee. I'm still looking for the upside to the current market.

  • Report this Comment On August 11, 2014, at 12:22 PM, staff1 wrote:

    'Yet the length of time that it takes job seekers to find work is absolutely staggering.'

    'It’s not a lie if you believe it…It’s a recovery if you believe it??

    The White House and Congress continue to follow the lead of their multinational campaign donors like lambs...pulling America along to the slaughter.

    There is a simple solution to poor US job creation. Show me a country with weak or ineffective property rights and I’ll show you a country with a weak economy and high unemployment. It’s that simple.

    Just because they call it “reform” doesn’t mean it is.

    http://www.npr.org/player/v2/mediaPlayer.html?action=1&t...

    http://www.npr.org/2013/11/06/243022966/secret-persuasion-ho...

    “patent reform”…America Invents Act, vers 1.0, 2.0, 3.0…

    “This is not a patent reform bill” Senator Maria Cantwell (D-WA) complained,

    despite other democrats praising the overhaul. “This is a big

    corporation patent giveaway that tramples on the right of small

    inventors.”

    Senator Cantwell is right. All these bills do is legalize theft. Just because they call it “reform” doesn’t mean it is. The paid puppets of banks, huge multinationals, and China continue to brain wash and bankrupt America.

    They should have called these bills the America STOPS Inventing Act or ASIA, because that’s where they’re sending all our jobs. These changes are killing our small and startup firms and the jobs they would have created. The present bill (vers 1, 2, 3, etc) is nothing less than another giveaway for huge multinationals and China and an off shoring job killing nightmare for America. Even the leading patent expert in China has stated these bills will help them steal our inventions.

    Patent reform is a fraud on America. These bills will not do what they claim they will. What they will do is help large multinational corporations maintain their monopolies by robbing and destroying their small entity and startup competitors (so it will do exactly what they paid for) and with them the jobs they would have created. They have already damaged the US patent system so that property rights are teetering on lawlessness. These bills will only make it harder and more expensive for small firms to get and enforce their patents. Without patents we cant get funded. In this way large firms are able to play king of the hill and keep their small competitors from reaching the top as they have. Yet small entities create the lion’s share of new jobs. According to recent studies by the Kauffman Foundation and economists at the U.S. Census Bureau, “startups aren’t everything when it comes to job growth. They’re the only thing.” Meanwhile, the large multinationals ship more and more jobs overseas. These bills are a wholesale destroyer of American jobs.

    Small entities and inventors have been given far too little voice on this bill when one considers that they rely far more heavily on the patent system than do large firms who can control their markets by their size alone. The smaller the firm, the more they rely on patents -especially startups and individual inventors. Congress and Obama tinkering with patent law while gagging inventors is like a surgeon operating before examining the patient.

    Those wishing to help fight big business giveaways and set America on a course for sustainable prosperity, not large corporation lobbied poverty, should contact us as below and join the fight as we are building a network of inventors and other stakeholders to lobby Congress to restore property rights for all patent owners -large and small, and the jobs they bring.

    for a different/opposing view on patent reform, please see…

    http://truereform.piausa.org/default.html

    http://piausa.wordpress.com/

    http://www.kentucky.com/2014/05/27/3260938/george-ward-paten...

    http://washingtonexaminer.com/patent-reform-like-most-reform...

  • Report this Comment On August 11, 2014, at 2:24 PM, EliotD wrote:

    quasimodo007, you can't be serious? You think that Wall Street and Big Business are Republican lackeys? Most big businesses are owned by Democrat donors, and 80% of Wall Street political donations go to Democrats! You are sooo on the wrong side.

  • Report this Comment On August 11, 2014, at 3:57 PM, johnsaxton wrote:

    Sean,

    Nice article but if you really want to be scared by a graph you need to take a look at the U6 rate. It is hovering around 12 - 12.5% unemployed. And you need to look at the quality of jobs being created. They are mostly low wage, low security service sector like travel and hospitality. Both among the first things to suffer when the economy suffers.

    When it goes bad next time my guess is that the headline unemployment number will hit mid teens to twenties without a sweat. Hang on!

  • Report this Comment On August 11, 2014, at 4:15 PM, coralspg wrote:

    I knew we were screwed when the GOP shut down the government. Of course, they didn't have to pay, we did. Vote out Republican Party officials. I'm over 60, and they (companies) only want to look at your last 10 years. Not your real experience.

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