Why the falling US unemployment rate matters

Earlier this year, our proprietary data led us to make a bold prediction: we estimated that the official United States unemployment rate would reach 5% by July 2015 (at the time, the rate was 6.3%). The report was published on HBR here, and the reader comments were aggressive, with many figuratively and one or two literally encouraging me to heave my projections into the trash bin. It seems one never wins in making bold projections, but in this case, the data was pointing to an obvious fact: we were massively underestimating the amount of jobs that would come available.

The economic scene seemed bleak at the time, so I can understand why the prediction was met with some hostility. On the one hand, the stock market was rallying, the rich seemed to be getting richer, and there was no end in sight for corporate profits. On the other, the unemployed weren’t finding work, the underemployed were leaving the job market entirely, and the working poor could not make ends meet. But there were signs of that changing, both politically, through minimum wage changes, and economically, through job growth from small businesses.

The latest report bears this out, with unemployment dropping to 5.8% — the first time we have seen unemployment dip below 6% since 2008. This is much lower than the Federal Reserve forecast and roughly in line with my firm’s aggressive projection of 6.0% for October 2014. Still, some analysts warn that the numbers are not indicative of true economic growth. Some say that the unemployment rate is irrelevant because it doesn’t count those who have stopped looking for work, and some say that it’s irrelevant against a backdrop of a tumultuous stock market and other negative indicators.

Given this lack of consensus, I felt it important to take another look at where the unemployment rate stands, where it is going, and what it actually means as an indicator of a healthy economy.

First, let’s get the stock market out of the way. Yes, the stock market has experienced some sudden peaks as well as some precipitous drops, and yes, that can be unsettling, especially if you’re an investor. But the truth is that the stock market does not drive the economy, nor is it terribly forward looking. It’s more often reactionary than predictive. Ironically, when we first made our prediction, many pundits used the historic growth in the markets as a counterpoint — arguing that businesses would need to focus even more so on increased earnings to sustain stock prices and that higher profits necessitate lower wages and greater unemployment. But regardless of whether stocks sail or tumble on a daily basis, we are currently seeing record corporate profitability drive a strong willingness to continue to hire.

A more valid concern is with the methodology behind the unemployment rate. It is true that the rate does not include people who have given up looking for work, and it’s fair to say it’s an imprecise way to count the number of jobless individuals. It is highly unfortunate that we don’t use a better measure. But that’s the way it’s been measured since we began measuring unemployment rates in the United States. It’s the most valid indicator we’ve got, and it’s the only one we can use to compare with previous periods in history. It is a relative measure of unemployment, and a steep drop, regardless of the size of the labor pool, is still a strong indicator of health. Many people have given up looking for work, but not so much that the relative unemployment rates have shifted materially.

Despite the labor force participation rate, we know that if we have 5% or less unemployment, even imperfectly measured, that’s a relatively low rate and a good thing. There will always be people who find it incredibly difficult to secure a job, and we are all sympathetic to those people and stand behind the government’s efforts to support them. But on a macro level, reaching 5% unemployment is a significant marker. It demonstrates our progress and tells us where we are on the unemployment cycle, which is not only predictable, but also has historically been a solid indicator of economic health.

Wage deflation has also been a recent issue, but even there we are making progress. While it is true that CEOs continue to see obscene wage increases, the bottom level of employment is starting to see signs of growth for the first time since the Great Recession: Corporations are slowly increasing wages and the government is beginning to make aggressive moves toward higher minimum wages, both nationally and at the state and local level. The Federal government moved the minimum wage for government contractors from $7.25 to $10.10, and President Obama is trying tosimilarly increase the national minimum wage. In my state, the governor of California signed a bill to move the entire state to a minimum wage increase of 25% by 2016. The City of San Francisco is working to increase their minimum wage to $15; Los Angeles is following suit. Agree or disagree with the philosophy, the fact is that we are finally focusing on the poorest working Americans. More can certainly be done, but things are slowly moving in the right direction.

We are still recovering from the Great Recession, but that doesn’t mean we shouldn’t celebrate the success we have had to date. We can argue about whether or not the unemployment definition is correct, whether there are enough jobs, or whether the minimum wage is high enough. Or, we can acknowledge that things are pointing positive in many cases, and where they are not, we can focus on addressing those issues. For unemployment, the bottom line is that it is falling faster than predicted, and that means there are more jobs available and there is more money cycling through our economy. We’re not yet exactly where we want to be, but the future is certainly looking brighter.

Published in collaboration with Harvard Business Review

Author: Jeffrey Stibel is Chairman and CEO of Dun & Bradstreet Credibility Corp.

Image: Motorized mannequins hold signs that read “Hire Me” in Toronto. REUTERS/Mark Blinch.