Low Unemployment Endures as Interest Rates Remain Elevated [VIDEO]

Few economic data points receive as much attention as the unemployment rate.  This figure is  calculated by dividing the number of unemployed individuals by the total labor force. It serves as a crucial gauge of labor market health and offers insight into the health of the economy.

Figure 1 shows the unemployment rate is currently 3.9%, which is low compared to historical measures:

The unemployment rate remains low despite the sharp increase in interest rates over the last two years. Typically, economists forecast higher unemployment rates as interest rates rise, the economy slows, and businesses scale back operations. Why has a low unemployment rate endured this time around?

One contributing factor is the number of people classified as “Not in Labor Force”.  This measure tracks the number of retired people, students, those caring for their children or other family members, and individuals who are not seeking work.

Early in the pandemic, many people left the labor force due to health concerns and childcare responsibilities. While some of those workers have returned, Figure 2 shows there are currently 100.4 million people not in the labor market:

In February 2020, there were 95.4 million people unemployed.  This means that 5 million people have exited the workforce since the COVID pandemic.

Where are those workers?

The labor force participation rate by age group offers some insight.

The participation rate for 25-54 year olds hasn't changed all that much climbing from 83.1% in January 2020 to 83.4% in February 2024. In contrast, the participation rate for those aged 55+ fell from 40.2% in January 2020 to 38.5% in February 2024.  This divergence suggests that workers nearing retirement accelerated their retirement plans as a result of COVID.

This structural change has likely provided an unexpected buffer, keeping employment levels tight in the face of elevated interest rates. It should be noted that unemployment is a lagging indicator and could still tick higher. The unique circumstances of this economic cycle continue to develop. The pandemic has passed, but its effects continue to linger.

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