Labor Market Strength: Why Hasn’t the U.S. Unemployment Rate Risen Further?

Chart of the Month
Written By Jonathan M. Elliott, CPWA®, CRPC®, CDFA®, ChSNC®, CPFA™, RMA®

Photo Credit: Clem Onojeghuo, Unsplash

Few economic data points receive as much attention as the unemployment rate, calculated by dividing the number of unemployed individuals by the total labor force. It is a crucial gauge of labor market health and offers insight into the economy and consumer spending power. The chart below shows the unemployment rate is currently 3.7%, which is low compared to historical standards. This is notable, considering that the US economy experienced one of the sharpest rises in interest rates on record during the past two years. Traditionally, one would expect unemployment to rise as interest rates rise, the economy slows, and businesses scale back operations and reduce their workforce in response to the changing economic environment. Why does the unemployment rate remain low today?

US Unemployment Rate Since 1950

US Unemployment Rate Since 1950

One contributing factor is the group classified as “Not in Labor Force,” which tracks the number of retired persons, students, individuals taking care of children or other family members, and others not seeking work. Many individuals left the labor force early in the pandemic due to virus concerns and childcare responsibilities. While some workers have returned, the second chart shows 100.3 million individuals not in the labor market, an increase of 5.1 million from January 2020.

Where are those workers? The labor force participation rate by age group offers potential insight. The participation rate for individuals aged 25-54 increased from 83.1% in January 2020 to 83.3% in January 2024. In contrast, the rate for those aged 55 and over decreased from 40.2% to 38.5% over the same period. This divergence suggests that workers nearing retirement accelerated their retirement plans. If those individuals hadn’t retired early, the unemployment rate might be higher today.

The increase in the number of individuals classified as not in the labor force significantly alters the labor market landscape. This structural change has likely provided an unexpected buffer, keeping employment levels tight and mitigating what might historically have led to a rise in unemployment. It should be noted that unemployment is a lagging indicator and could rise as higher interest rates make more of a cumulative impact. However, with the unique circumstances of this economic cycle, the ceiling on unemployment may be lower with a smaller rise than in prior cycles. The pandemic has passed, but its effects continue to linger.

Not in Labor Force Population

US Not In Labor Force Population
 

Important Disclosures
This material is provided for general and educational purposes only and is not investment advice. Your investments should correspond to your financial needs, goals, and risk tolerance. Please consult an investment professional before making any investment or financial decisions or purchasing any financial, securities, or investment-related service or product, including any investment product or service described in these materials.

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Jonathan M. Elliott, CPWA®, CRPC®, CDFA®, ChSNC®, CPFA™, RMA®

I am currently the Managing Partner for our independent investment advisory firm, Optima Capital Management. Together with my business partners, Todd Bendell CFP® and Clinton Steinhoff, we founded Optima Capital in 2019 as a forward-thinking wealth management firm that serves as an investment fiduciary and family office for high-net-worth individuals and families. In addition to being the Chief Compliance Officer, my role at Optima Capital is portfolio management. I have over 18 years of experience in managing investment strategies and portfolios. I specialize in using fundamental and technical analysis to build custom portfolios that utilize individual equities, bonds, and exchange-traded funds (ETFs). I began my financial services career with Merrill Lynch in 2003. At Merrill, I served in the leadership roles of Market Sales Manager and Senior Resident Director for the Scottsdale West Valley Market in Arizona. On Wall Street Magazine recognized me as one of the Top 100 Branch Managers in 2017. I am originally from Saginaw, Michigan, and a marketing graduate from the W.P. Carey School of Business at Arizona State University. I am a Certified Private Wealth Advisor® professional. The CPWA® certification program is an advanced credential created specifically for wealth managers who work with high net worth clients, focusing on the life cycle of wealth: accumulation, preservation, and distribution. In addition, I hold the following designations - Chartered Retirement Planning Counselor (CRPC®), Certified Divorce Financial Analyst (CDFA®), Certified Plan Fiduciary Advisor (CPFA), and Retirement Management Advisor (RMA®). In the community, I am a member of the Central Arizona Estate Planning Council (CAEPC) and serve as an alumni advisor and mentor to student organizations at Arizona State University. My interests include traveling, outdoors, fitness, leadership, entrepreneurship, minimalism, and computer science.

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