According to employment statistics released Friday, the
unemployment rate dropped slightly in April. Given the
circumstances, though, this was not greeted as good news.
According to the
Bureau of Labor Statistics
, the unemployment rate dropped to 8.1 percent in April. This was
the second consecutive monthly decline, and brought the
unemployment rate down to its lowest level since January 2009. A
year earlier, the unemployment rate was 9.0 percent, and at the end
of last year it was 8.5 percent. In that context, one might think
that an 8.1 percent unemployment rate represents progress.
So what's the catch?
Troubling job trends
There are two problems with recent employment figures.
One problem is that the pace of job creation is slowing. The
number of new jobs has fallen from 259,000 in February to 154,000
in March to 115,000 in April. These figures reveal not only a weak
level of job growth, but also a troubling direction for the months
The second problem is a little less obvious, but it helps
explain why the drop in the unemployment rate is less of a positive
development than meets the eye. The unemployment rate is a function
of how many people are looking for work, compared to the total
number of people participating in the labor force. What taints the
redution in the unemployment rate a little is that an increasing
portion of the adult population is no longer participating in the
In April, the labor participation rate fell to 63.6 percent, the
lowest in more than 30 years. Some chalk this up to the
hopelessness of the recent job market, but this figure has been
declining since the year 2000. That may be an indication of when
the economy first began to decline, or it may be a function of an
baby boomer generation
. Whatever the cause, though, a declining labor force is not
conducive to strong economic growth.
Employment and savings account rates
Employment is a key economic indicator, but it has particular
significance to the current low interest rate environment. For one
thing, lowering the unemployment rate is one of the primary goals
Federal Reserve's low interest rate policy
. As long as unemployment remains high, the Fed is likely to
continue encouraging extremely low interest rates.
Also, employment growth is an indicator of business optimism.
When companies are hiring, it means managers are optimistic and
looking to expand. This same optimism creates loan demand, which is
a key ingredient to getting banks to offer higher
savings account rates
. When the loan business is sluggish, banks simply don't have as
much incentive to attract deposits. When banks can make a healthy
profit by loaning out money, they are more likely to offer higher
deposit rates to attract deposits that they can use for
This is why a falling unemployment rate is more bad news for
savings account interest rates. There needs to be strong growth in
the underlying number of jobs -- not just an easing of the
unemployment rate -- to signal the type of growth environment that
would fuel loan demand. In that context, the slowing pace of job
creation over the last two months represents yet another obstacle
to the nation's savers.