Unemployment Rate Holds Steady As Workforce Participation Fails To Rebound

The Labor Department said Friday the U.S. economy added 217,000 jobs in May, just slightly below economists’ expectations of 218,000 jobs. The headline unemployment rate remained flat at 6.3 percent, though it was expected to have increased slightly due to Americans reentering the workforce.

The labor force participation rate, a key gauge of the percentage of working-age Americans currently employed, has been disastrous as vast numbers of workers have left the workforce each month out of frustration in finding a decent job. The number of unemployed persons was unchanged in May at 9.8 million. To be fair, the rate has also been exacerbated by the number of people either eligible for retirement or forced into early retirement.

The abysmal 62.8 percent labor force participation rate, which is at its lowest level in four decades, is the only reason the unemployment rate has fallen rapidly in the years since the recession ended in 2009. David Kelly, chief global strategist for JPMorgan Funds, said weakness in the labor force participation rate is a reminder of “some sluggish U.S. economic fundamentals.”

“Lack of investment spending in recent years has sapped productivity growth while the retirement of the baby-boom is largely responsible for the weakness in labor force growth and neither of these problems are likely to be remedied over the next few years,” Kelly said ahead of the release of Friday’s labor report.

“The participation rate has shown no clear trend since this past October but is down by 0.6 percentage point over the year,” the Bureau of Labor Statistics said in their report. “The employment-population ratio, at 58.9 percent, was also unchanged in May and has changed little over the year.”

The employment-population ratio is actually seen as a better indicator of labor force strength or weakness, though media tends to focus on the participation rate.

The Fed’s has become increasingly alarmed over inflation recently, causing economists to more closely scrutinize the monthly wage figures.

Wages were essentially stagnant in April, again, with average hourly earnings for nonfarm employees staying put at $24.31. Still, over the past 12 months average hourly earnings have increased slightly by 1.9 percent, which is just below the Fed’s 2 percent target rate for inflation. However, the cost of health care and other goods and services are increasing faster than wages can keep up with.

The Fed knows the headline unemployment rate is misleading as an indicator for the health of the broader economy, so they have opted instead to focus on the inflation rate to make future policy decisions, including the inevitable raising of interest rates.

Wages will play a key role in pushing inflation higher toward the Fed’s desired threshold. As wages move higher, workers naturally spend more money, which creates demand for goods and ultimately pushes prices higher.