When Will The Unemployment Rate Increase?

The economy may be picking up steam, the jobs reports are sounding more positive; so when is the unemployment rate going to increase?  Going to increase??  Yes, increase.

It all has to do with the labor participation rate which has been in the news frequently in this cycle because it remains so high.  During a recession, and during the early stages of a recovery, many people quit looking for work because there are few jobs available.  These people are not counted as unemployed because they are not actively seeking employment and are not factored into calculating the unemployment rate.

However, as a normal recovery progresses, these people reenter the workforce in droves to compete for the many jobs being created.  Since there is still a lag time for these “reentries” to find a job, the unemployment rate can jump up for several months as the labor market resets.  You get a headline that reads:  June Shows Very Strong Job Growth - Unemployment Rate Rises.”  This sends the news commentators into a tizzy and confuses people.

But there is something unusual happening because the labor participation rate actually dropped in April as another 800,000 stopped looking for work.  The rate fell to 62.8%, a 35-year low (back before women started to enter the labor force in large numbers).

Why is the Participation Rate So Low?

Demographics

Because many baby boomers are retiring, the participation rate will remain lower than peak indefinitely.  Some economists claim this is the only reason for the low participation rate.  However, they ignore the other factors; they also ignore that many older workers were forced out of their jobs by the Great Recession and are too old to start new careers, so they retired “prematurely.”

Entitlements

Government assistance programs increased greatly after the Great Recession. Yes, these were needed to help people in true need. However, a large number of people figured out how to game the system and receive funds without making a serious effort to find work.  Regardless of your political views, the law of economics says that if you pay people not to work, you get less people working.

The Cultural Loss of the Work Ethic

There is a cultural shift going on regarding the “traditional” work ethic in the United States.  People with a strong work ethic have problems understanding this transformation and deride it, but that doesn’t mean it isn’t real.  Many people are avoiding work because they can. Whether it is the government assistance programs mentioned above or relying on friends and relatives, people are getting their basic needs met without having to work.

This cultural shift is largely generational.  I know of one company that closed a unionized plant in the north and transferred the work to a plant in the south.  However, the younger workforce in the new plant was much less productive that the old, and older, workers in the north.

Recently, MSN Money posted an article about how teenagers now do not want summer jobs. It says the number of teens with summer jobs has fallen 30 percentage points since the late 70’s.

This loss of work ethic, especially in the younger generations, has profound implications for our industry.  Older truckers are retiring and fleets need younger drivers to take their seats, but this is not happening.  FTR has been detailing the coming driver shortage and estimates there is a negative 4.3% unemployment rate for truck drivers (we need 4.3% more drivers than we have).  Truck driving is hard work and is not a desirable field to a generation that values hard work less.

We even saw this resistance to factory work back in 2006 when the trailer market peaked.  Some OEMs could not find enough workers willing to do factory jobs to staff their production lines.  Now that the commercial transportation equipment market is growing and OEMs are boosting line rates, this factor will come back into play.  The OEMs that gain market share in this upturn will be the ones that have the best access to new workers.

How Do We Respond To This Cultural Change?

Cultural shifts are very difficult to deal with in the short-term. Here are several of the factors in play regarding truck drivers:

Pay

Of course wages have to increase due to the forces of supply and demand, however things are jumbled up.  Because new workers value the job less than current workers, you will have to pay them more.  Two-tier wage plans are common in the auto industry, but there the current workers make more than the new ones and it is fairly easy to implement.  The situation now in trucking is an implementation nightmare.  You won’t find this one discussed in any economics books because it is caused by a major cultural shift.

Work Conditions

There will have to be major concessions to improve work conditions, and not just the obvious ones.  The younger workers have different needs and different viewpoints which require different solutions.  Distribution and warehouse systems may need to change significantly in the long run to accommodate this shift. 

Technology

A younger generation raised in a technologically advanced world expects their workplace to be technologically up to date.  It is the equivalent of an experienced worker starting a new job and being issued a Commodore 64.  New workers will not stay with fleets where the technology is not up to their standards, and their standards happen to be higher than yours.

Training

Very affordable training must be available.  Younger workers will expect training to be easy, accommodating to their needs, and inexpensive.  We should lobby hard for increased government assistance in this area.  Considering all the regulations that the government is imposing on trucking that hurts productivity and exacerbates the driver shortage, here is one thing it could do to help us. Come on Uncle Sam, you owe us on this one. 

This post first appeared on the FTR website.  FTR is the leader in analyzing and forecasting the commercial transportation industry.  For more information on FTR reports and services, please click here.)