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The US labour market matters

  • Published at 08:07 pm June 26th, 2016
The US labour market matters

The US economy has been recovering steadily since the global financial crisis (GFC) in 2008. One major indicator of economic recovery is the unemployment rate.

The US unemployment rate peaked at 10% in October 2009 during the height of the recession that followed the GFC.

The latest figures show that the unemployment rate has halved to 5% in March 2016. This significant fall in the US unemployment rate to pre-GFC levels bodes well for the US economy. Chart 1 shows a 10-year history of the US unemployment rate.

That said, the unemployment rate is a combination of two things, and movements in the overall unemployment rate do not fully reveal the true picture of an economy’s labour market.

The unemployment rate measures the number of unemployed as a share of the total labour force. In the US, the number of unemployed has fallen from over 15 million in October 2009 to less than 8 million in March 2016.

In other words, the American economy has created about 7 million jobs since 2009. That is great news not just for American families, but the global economy in general.

chart 1

Rebound in labour force participation

Recent improvements in American labour force participation is very encouraging and perhaps marks the beginning of an important inflexion point for the American economy.

The labour force participation rate measures the number of people actively looking for jobs as a share of the total population.

In America’s case, the labour force participation rate has seen long-term decline since the early 2000s.

Economists have attributed this trend to America’s ageing population.

As Americans get older, more and more workers are retiring and leaving the workforce, thereby lowering the labour force participation rate.

The GFC also had a major impact on lowering the labour force participation rate.

Bangladeshi exporters are likely to benefit directly from US income growth and higher consumer demand, especially RMG exporters. It should come as a welcome relief after the recent years of under-performance of RMG exports to the US

Many economic studies have shown that, during major recessions, unemployed workers become frustrated from not being able to find work and choose to leave the workforce entirely.

This is evident from the chart 2, which shows the US labour force participation rate falling more steeply since 2008, when the GFC occurred.

Notwithstanding the long-term decline, US labour force participation rate has increased for six consecutive months since September 2015. It is the first time since 2005 that such a trend has been evident in the American labour market.

It suggests that the US economy is finally experiencing broad-based economic growth that is raising the confidence of US workers to return to the labour market and start looking for jobs again.

More than GDP growth numbers, increases in the labour force participation rate is a truer reflection of sustained economic growth, and, it would appear, that the US economy has finally reached that turning point.

chart 2

Why should Bangladeshis care?

Strong US growth undoubtedly provides a boost to the global economy. A strong, sustained recovery in the US labour market has even greater implications.

It is likely to lead to higher wages and income in the US, boosting household consumption and demand. This, in turn, is likely to be a strong driver of international trade and investment, as American multinationals invest at home and abroad to meet strong domestic consumer demand.

Bangladeshi exporters are likely to benefit directly from US income growth and higher consumer demand, especially RMG exporters.

It should come as a welcome relief after the recent years of the under-performance of RMG exports to the US.