When the March jobs report came out Friday, investors and commentators focused on the weak job growth of 98,000. But they missed the real story.
The civilian unemployment rate hit 4.5% in March for the first time since April 2008. And the way it got there was good news, too. The number of people unemployed five weeks or less declined by 232,000 last month, and there was no change in workforce participation, the Labor Department reported.
Meanwhile, the number of people who have stopped looking for work because they think there are no jobs is down more than 20% from last year, and so is the number of long-term unemployed.
That means Federal Reseve Chair Janet Yellen was probably right when she argued back in January that the U.S. economy is close to full employment.
What is full employment and what does it mean for the market or investors?
Full employment is what economists call the “natural rate” of unemployment, at which, according to The Economist, “all the workers who can easily or usefully be hired are working” and so to hire more people, employers have to raise wages.
When wages start rising, of course, the Federal Reserve often starts raising the federal funds rate to tamp down inflation. That’s always the biggest danger to any stock market rally.
Many people have argued the labor market is nowhere near full employment, because of chronically low workforce participation, particularly among non-college-educated males. (By one broader measurement, U6, which includes total unemployed workers “marginally attached to the workforce,” and those working part time who want to be full time, the unemployment rate in March was 8.9%.)
I’ve written about that often, looking at the impact of trade, immigration, globalization, and technology. But I’d argue, sadly, that a lot of those who are out of work are people whose skills aren’t needed in a 21st century economy and who can’t or won’t move or retrain.
Also, some conservative researchers like Nicholas Eberstadt and Charles Murray (yes, the one who was attacked at Middlebury College recently) have argued that government programs like disability and Medicaid and changing cultural norms and alternative leisure pursuits (like video games) have made it possible and socially acceptable for people to get by outside the workforce.
Whatever you may think of that, at least by the official unemployment rate, we’re reaching full employment. The unemployment rate hit 3.8% in April 2000 and 4.4% in the spring of 2007. In retrospect, that was full employment, and coincided with the market peak in both those cycles.
I’m not saying we’re at the peak of this cycle, but if we’re near full employment, we’re getting closer than we think.