How the labor market impacts investors

The job market matters to investors

For many people, the true measure of a healthy economy is whether or not they can find a good job. Everyone wants to get paid, right? For investors, the labor market, also known as the job market, has even broader implications. A healthy job market often suggests that the economy is doing well, which is a key indicator in determining whether asset classes like stocks can also perform well.

The gov’t crunches the numbers monthly

The government releases a new set of job market numbers each month that measures how many jobs were created and what percentage of the the labor force — which includes individuals who have jobs or are actively looking for jobs — is employed. Taking a broad view of these numbers makes it clear that a lot has happened in the job market over the last ten years.

The chart below shows the US unemployment rate (blue) and the underemployment rate (orange), which is the number of workers employed part-time but seeking full-time positions. In 2008, at the height of the recession, the unemployment rate across the country rose to 10%. This basically meant that one out of every ten people that were looking for work couldn’t find a job. Yikes! This was a very high unemployment rate by any measure. Today, the national unemployment rate sits at around 3.9% as of December 2018.

This chart shows the US unemployment and underemployment rates.

Source: Clearnomics, Bureau of Labor Statistics

Some factors may be missed by the unemployment rate

There are two factors that this nation-wide unemployment rate doesn’t capture. First, unemployment rates can vary widely across different places. In those cities and states hit hardest by the housing bubble and financial crisis of 2008, unemployment was much higher. Second, the standard unemployment rate only includes people who are looking for work. Thus, it may understate the true level of unemployment since those who have completely given up are no longer included in this number.

Technology has a major influence on the job market

Of course, a lot is happening in the world that may permanently change the job market. New technologies and automation have, over the course of the last several decades, made certain types of jobs obsolete or more difficult to find. The gig economy (i.e., Uber, Lyft, and TaskRabbit) has also affected the job market as people find flexible part-time work that can still pay the bills. It’s clear that technology is forcing the economy to evolve.

The job market is a key economic indicator

Beyond whether we can find jobs or not, how does the job market affect us as investors? The job market is a key economic indicator that many economists use to determine where we are in the business cycle. At this point – with the unemployment rate near historic lows – it’s clear that we’re later in the cycle. During the last phase of a business cycle, stocks tend to become too expensive, and the economy begins to slow down. For many investors, this is an indication to stay diversified in their investment portfolios.