By Prakarsh Jain
The news (in the side-stream media, for obvious reasons the mainstream would not report) was in regards to the change in methodology of calculating the inflation rate approximately 20 times in the past 4 decades by the world super power, United States. Before we could conclude on to that discussion, the new is waiting to make its way and it’s the unemployment rate, the rate on which the Federal Reserve based the decision of tapering quantitative easing.
Before the high-fiving begins about unemployment falling, the consideration should be, a bit cynical, is it really sinking, and with what good reasons is it. High-fiving thereafter would probably be worth it.
The Good News:
- Unemployment fell to 6.7 per cent in December 2013 from 7 per cent in November.
- Unemployment plunged to 6.7 per cent in December 2013 from 7.5 per cent in June and way down from the high of ~10 per cent in 2010.
The Reasons: Economics has played a good game in favour of the Bureau of Labour Statistics, the big drop in unemployment was due to the number of people dropped out of the labour force (347,000 to be precise). What does this mean; it means they have stopped looking for work, which eventually means they are no longer unemployed. (Economic concept of labour force participation rate is used for calculation of the unemployment numbers). This is the newest chapter in what has been dramatic flight from the labour force since the Great Recession. The labour-force participation rate, of working-age people who have a job or want one, has plummeted to ~60 per cent, the lowest since 1978.
Some of this can be attributed to the Baby Boomers retiring. However, most of it certainly has to do with the fact that the economy is still weak to create enough jobs which would draw people into the market. This is evident with the fact that newer people are parting the labour force or are never even entering (they cannot find jobs). They are doing nothing but are going back to school, or eating cereal and watching Netflix.
Steady decline in the labour force is creating an impact on unemployment for the first time in recent history.
The lessening of labour force is the main factor pulling unemployment down and not otherwise. We cannot rule out that some job growth would have helped to change the numbers. However, the tumbling unemployment rate does not tell the full truth about the economy.
The evidence substantiates itself by Chairman Bernanke admitting as much and therefore indicating, the Federal Reserve would not cut interest rates any time soon after unemployment hits the Fed’s target, a target that could be attained in coming month itself.
Prakarsh Jain is a graduate in Commerce from Jai Hind College, post-graduate in Master of Global Business-Investment Banking & Wealth Management from S P Jain School of Global Management and a Chartered Accountant (CA). Currently, Mr. Jain is working with Mizuho Securities, a wholly owned subsidiary of Japanese investment Bank in Corporate Advisory team. From an early age, Prakarsh has been actively involved in various competitions & debates at national/international level and in recent time has represented UAE at the KPMG International Case Competition (KICC 2013) held in Spain. In addition, he has also acted as a delegate at the World Islamic Banking Conference: Asia Summit held in Singapore.
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