All in a Day’s Work
January 2023
It is neither wealth nor splendor, but tranquility and occupation which give you happiness. Thomas Jefferson
| Item | YTD Change |
| S&P 500 Index | -19.44% |
| Dow Jones Ind Avg | -8.78% |
| EAFE Foreign Index | -16.29% |
| Emerging Market Index | -21.08% |
| Barclays Agg Bond Index | -21.79% |
| 10-Year Inflation Forecast | 2.30% |
| Unemployment Rate | 3.7% |
*Market index data as of 12/31/2022
Econ majors are taught early on the significance of the factors of production, the inputs required for creating a good or service, which include land, labor, capital, and entrepreneurship. There’s a fifth factor that’s often overlooked but equally important, and that is a system of government that enforces rule of law and protects property rights, but that’s a topic for another day. Today we’re going to focus on just one factor; labor.
The BLS is responsible for providing most of the domestic labor data. And while economists literally track hundreds of different labor stats, the headline reports tend to be unemployment, participation rate, wages, and productivity. Let’s look at each.
Unemployment Rate
*FRED
Unemployment bottomed at 3.5% in 2019, then due to the COVID lockdowns peaked the following April at 14.7%, and has since fallen to 3.7%. On the surface the current unemployment rate would suggest overemployment, or a labor market in a state of disequilibrium, putting too much power in the hands of labor. More on this later.
The labor participation rate is an estimate of an economy’s active workforce. While the participation rate has been declining since 1998, it experienced an increase between 2016 and March 2020, until the lockdowns were imposed, at which point the participation rate plummeted from 63.4% to 60.2%. But unlike the unemployment rate, which is nearly the same as it was pre-lockdown, the participation rate has not recovered, and is currently trending at ~62%.
Real wages are simply nominal wages adjusted for inflation, and peaked in early 2020. As evidenced by this chart, real wages are lower today than prior to the lockdowns. Inflation doesn’t just compress stock, bond, and real asset prices, but real wages as well.
Non-Farm Productivity
*BLS
Labor productivity measures the hourly output of a country’s economy. Specifically, it charts the amount of real gross domestic product (GDP) produced by an hour of labor. As evidenced by the chart, productivity has fallen 1.3% between Q3 2021 and Q3 2022. It’s important to note that economic output is the product of total hours worked x productivity. Absent a greater increase in hours worked, when productivity declines so too does GDP.
Total Non-Farm Employment
*FRED
This statistic is largely overlooked by economists but the most significant. Total non-farm employment stood at just under 153 million in February 2020. Not surprisingly, at the height of the lockdowns 22 million employees were jettisoned from the workplace. While this number recently surpassed its 2020 peak, we have lost nearly three years’ worth of growth in the labor market. Based on its pre-COVID trajectory, the workforce should currently exceed 160 million, or about 6 million more than we have today, which explains why help wanted signs have become ubiquitous.
Economic growth depends on two factors: workers and productivity. But not only is productivity currently declining, but millions of able-bodied Americans have simply left the work force. Specifically young men. Over the past decade employment for men ages 20–24 declined by nearly 9%, and by more than 14% for ages 16–19. Which begs the question, why? Mohamed El-Erian blames enormous handouts for causing a demand surge. Couple that with a culture that no longer places value on work and has removed any stigma associated with not working. For millions of young men, living in their folks’ basement has become a life choice.
The rate of unemployment has been a bellwether economic indicator, but in a society absent consequence for choosing not to work then it no longer has the same value. So, what’s the answer? I believe it’s two-fold; first, government should dust off the Bill Clinton welfare reform playbook, which slashed welfare rolls and helped transition millions of Americans back into the workforce. Second, and perhaps more challenging; teach younger generations that work and self-reliance not only improve prosperity, but more importantly serve to increase human dignity and happiness, which simply cannot be quantified in economic models.
Mark Lazar, MBA
Certified Financial Planner™
Pathway to Prosperity
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