The US is enjoying an economic miracle. Next week’s figures are likely to show that the unemployment rate is a mere 3.6 per cent, close to its lowest for 50 years.
This is great for share prices. There has for years been a strong correlation between equity valuations and the misery index, the sum of unemployment and inflation rates. Which means that as long as the latter stay low, share prices can stay high.
But as David Hume famously pointed out, we must be very sceptical about reports of miracles. And indeed If we look beneath the headline figures, the US’s labour market seems less impressive.
One fact tells us this – that only 61 per cent of the working age population is actually in work. This is less than we saw at any time between 1987 and 2007.
How can we reconcile this with low unemployment? Simple. The unemployment rate tells us the fraction of the labour force who are out of work. If people drop out of the labour force, though, they’ll be neither in work nor unemployed. A low rate of employment relative to the population will then coexist with a low unemployment rate.
And this is just what has happened. There has been a long-term decline in the proportion of working wage men who are in the labour force. Today, only 69.1 per cent of men under 64 who are not in prison or the military are in the labour force. That compares to over 73 per cent in 2007 and over 85 per cent in the 1950s.
Millions of men, then, have vanished from the labour market. Where have they gone? Dionissi Aliprantis and Mark Schweitzer at the Cleveland Fed say that some have become opioid addicts: they show that areas with more opioid prescriptions have lower employment rates. And Chicago University’s Erik Hurst and colleagues claim that more young men are out of the labour force playing video games.
There is, however, a problem with these explanations. If the supply of labour has fallen because more men are off their heads or are playing Grand Theft Auto then we should be seeing rising wages as firms bid more for the fewer workers who are available. But this isn’t happening. Next week’s numbers are likely to show that wage inflation is still low, at around 3 per cent, and has actually fallen since earlier this year.
This might be because, as the Bank of England’s Andy Haldane has said, wage bargaining has become more atomized. If you work in a factory or mine with hundreds of others, you can club together to parlay increased labour demand into higher wages. If, however, you are a Deliveroo rider working alone you have less bargaining power.
Or there might be something else. We must always ask: what’s cause and what’s effect? It could be that men are on opioids and video games because they got hooked on them after becoming unemployed, especially during the Great Recession. Drop-outs from the labour market are then effect, not cause. Gray Kimbrough at the American University in Washington says this is the case for video game players. But Aliprantis and Schweitzer doubt it is true for opioid addicts, pointing out that their numbers didn’t rise much as a result of the 2008-09 recession.
Though this point is unclear, what does seem clear is that an economic miracle is not the same as a social miracle. It’s lucky, then, that equity investors care only about the former.
