How Strong is the U.S. Job Market?

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Although the length of unemployment has improved, it is still well above historical averages. Credit: U.S. Department of Labor.

Although the length of unemployment has improved, it is still well above historical averages. Credit: U.S. Department of Labor.

All great change in America begins at the dinner table — Ronald Reagan

Even the Gipper would agree that five long years of anything alters the standard perception of “change” dramatically.

U.S. Economy: Past and Present

In the wake of the devastating housing market crash and subsequent years of a moribund economy, it’s almost surprising to see new construction springing up everywhere once again.

In parallel, although the official U.S. unemployment rate remained unacceptably high at 7.6% in May (up one-tenth of a percent from the previous month), green shoots are finally beginning to appear in that arena as well.

Earlier this month, the Labor Department reported that despite the slight upward tick in the unemployment rate, the economy netted approximately 175,000 new jobs.  The net job growth, in and of itself, is not atypical, as it represents the approximate average monthly increase generated by the recovering U.S. economy over the past 31 months. More telling is an ironic statistic: 2.25 million people quit their jobs in April, just below February’s four-year high figure.

Unemployment Forms

How can something that on the surface would seem to add millions to the unemployment rolls actually be a positive sign for the labor market? To understand, we must first look at the five different forms of unemployment.

  • Frictional Unemployment: Frictional unemployment is:  “Unemployment that is always present in the economy, resulting from temporary transitions made by workers and employers or from workers and employers having inconsistent or incomplete information,” according to Investopedia. In short, there is always transitional unemployment due to lack of perfect information and/or timing.
  • Seasonal Unemployment: Business Dictionary defines seasonal unemployment as “An elevated level of unemployment that is expected to occur at certain parts of the year.” A number of industries have defined, significant peaks and valleys with respect to production, and as such, their employment requirements rise and fall in concert.
  • Structural Unemployment: Investopedia states that structural unemployment is “Unemployment resulting from changes in the basic composition of the economy.” Typically, this form of unemployment represents technological changes which both eliminate certain positions and open up others.
  • Cyclical unemployment: According to Investopedia, Cyclical unemployment is: “A factor of overall unemployment that relates to the cyclical trends in growth and production that occur within the business cycle.” As an economy gains strength, cyclical unemployment drops due to increases in output; conversely, as it weakens, this form of unemployment rises.
  • Institutionally-induced unemployment: Finance-Lib characterizes induced unemployment as unemployment due to institutional phenomena such as the degree of labor force unionization, the level of discrimination, and government policies such as unemployment insurance programs, minimum wages, or regulations on business.”  This final type of unemployment has to do with wide-scale policies or practices that ultimately interfere with the natural supply and demand of the labor market.

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