Tight Labor Market Could Hurt in the Long Run

The U.S. labor market has been in the spotlight over the past week with several different economic reports being released. The bulk of the reports show that the U.S. labor market is the strongest it has been in decades.

The March employment report was released on Friday, and it showed that non-farm payrolls bounced back nicely after the subpar report in February. The economy added 196,000 jobs during the month, and that was much better than the 33,000 that were added in February. The numbers for February were revised upward from 20,000. The unemployment rate remained at 3.8%.

While the March employment report garnered the most attention, there was another report on Thursday that got my attention. The weekly initial jobless claims report showed initial claims fell to 202,000 in the previous week and that was the lowest reading since 1969. This shows that employers are hesitant to let go of employees because the labor market is so tight.

Yet another report came out on Tuesday that confirmed the information from the initial jobless claims report and the March employment report. The National Federation of Independent Business (NFIB) released its March optimism index and it provided even more proof that the labor market is incredibly tight. The overall index came in at 101.8 for March, and that was up from a reading of 101.7 in February. The index fell in the fourth quarter, but appears to have stabilized in the first quarter.

The interesting part of the report was what these small businesses were saying about hiring. Of the respondents, 60% are hiring or trying to hire employees. However, 54% (or 90% of those trying to hire) responded that they were finding few or no qualified applicants for the open positions.

Finding qualified workers was listed as the Single Most Important Business Problem by 21% of respondents and that is only four points shy of the all-time record high. As for positions going unfilled, 39% of owners reported openings that they couldn’t fill. That ties the record high set in December.

For the most part, all of this information is a good sign for the economy. One of the few items that came out and was disappointing was the average hourly earnings for March. They increased by 0.1%, but that was below the 0.4% increase in February and below the estimate of 0.2%.

The full employment status and the difficulty business owners are having in finding qualified individuals do concern me going forward. Our economy has changed dramatically in the last few decades as more jobs are service oriented or require technical skills.

Automation processes have reduced the number of jobs in certain industries and our workforce hasn’t shifted as fast as it needed to, and that is helping to create the shortage of qualified workers. This is happening at a time of full employment and therefore the vocational training that is needed to fill certain positions isn’t happening. This could perpetuate the problem because a great deal of vocational training occurs due to workers being laid off or out of work for one reason or another.

What’s going to happen if we go into a recession? Now we will have unemployed workers that can receive the necessary training to fill the jobs that are open now, but those jobs may not be needed any longer. If the business owners see a slowdown in their business, they aren’t going to be looking to hire at the same rate they are now.

We haven’t had a recession for over a decade now, and most economists expect one to come within the next few years. With the current tight labor market and the inability to find qualified workers, it could mean that when a recession does come, it could last a little longer than the usual recession. Workers will have to adjust to learning new skills and possibly in different fields. This adjustment will take time and that could cause the economic slowdown to be prolonged.

The labor market looks great right now, but the full employment status could be a bad omen for the economy going forward.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.

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