How falling jobless rates affect you
Availability of employment can lead to raises, but threat of recession looms
How low can unemployment go? The rate fell to 3.8% last month, lowest since April 2000. Before that, it touched 3.4% in 1969 and hit a record low of 2.7% in December 1952.
But first, before you get too excited, some perspective.
A big reason unemployment dropped last month is the portion of Americans working or looking for jobs dipped to 62.7%. That share, known as the labor force participation rate, generally has been falling for years as Baby Boomers retire.
Also, many men ages 25 to 54 remain outside the workforce as a result of the opioid crisis and the loss of manufacturing and construction jobs during and after the recession of 2007-09.
In other words, many people aren’t officially considered unemployed because they’re not actively looking, although they really would like jobs.
“You’re able to pull (the unemployment rate) down because you don’t have as many people participating,” says Diane Swonk, chief economist of Grant Thornton.
Same low rates, different economies
By contrast, the 3.8% unemployment rate in 2000 came when 67% of Americans ages 16 and older were working or looking for jobs. That means that even though lots of Americans were hunting for work, there were plenty of jobs available and fewer people languishing on the margins.
The difference between the two eras can be viewed through the prism of economic growth. The economy grew 2.3% in 2017 and may approach 3% this year, but that’s with big government tax cuts and increased spending that has swelled the federal deficit. The economy grew a robust 4.1% in 2000, when the government enjoyed a budget surplus.
So with all that, what could the rate dip to?
Swonk believes unemployment will bottom out at about 3.5% by the end of the year.
Raises, then recession
She predicts the federal deficit — projected to reach $1 trillion by 2020 — will push up interest rates over the next year or two, dampening economic growth. And higher Trump administration tariffs on imports will likely fuel faster inflation and force the Federal Reserve to raise short-term rates more rapidly. Low unemployment also could force employers to raise wages and prices more sharply, further spurring Fed rate hikes. Any of those scenarios, she says, would crimp growth and lead to a recession by late 2019 or early 2020 that drives unemployment higher.
Dean Baker, co-founder of the Center for Economic and Policy Research, is more sanguine. He foresees unemployment falling to about 3.2% over the next year or so as Baby Boomer retirements shrink the pool of Americans looking for jobs. He thinks inflation will pick up but remain fairly tame as a result of longterm factors that are keeping a lid on wages and prices, such as e-commerce, the global economy and the decline of unions. That should allow the Fed to nudge up rates gradually and stave off recession in the near term, he says.
Automation worries
Yet as the labor market tightens further and wages climb, businesses are more likely to replace workers with automation or combine two jobs into one, Baker says. That could push unemployment higher or at least keep it from falling further.
David Berson, chief economist at Nationwide, is even more bullish. He believes that by 2020, unemployment could slide below 3% for the first time since 1953.
“I think the expansion could go on for a number of years,” he says.
Going with that optimistic outlook for a moment, could unemployment drift down to 2%? 1%? Zero?
Down to zero?
Not really. There’s always some level of unemployment after people leave jobs and before they land new ones, Baker says. And, he says, some workers who live in inner cities or rural areas simply can’t get to where the jobs are.
For the most part, very low unemployment is a good thing for the economy and society. It means more workers can find jobs and leave their current positions for better ones. And it should push average annual pay increases above 3% by the end of the year, economists say.
For companies, though, it means higher labor costs that narrow profit margins. And that may eventually coax them to replace some workers with machines. Lower profits also likely would hurt the stock market, curbing Americans’ wealth.
And when unemployment gets historically low, some firms can’t meet customer demand. “Some employers wouldn’t be able to get workers and could go out of business,” Baker says.