Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / Why Long-Term Unemployment Is Surging With a 4.3 Percent Jobless Rate
Transcript
- Lucas: So the May jobs report comes out tomorrow — Friday June fifth — and pretty much every preview is saying the same thing: expect another solid payroll number, unemployment holding at 4.3 percent, wage growth ticking up a couple cents. Normal, boring, good. Luna: Right, the consensus is around 180,000 to 200,000 jobs added. Nothing dramatic. Lucas: But here's the thing I keep coming back to — and I think it's the most underappreciated number in the labor market right now. Long-term unemployment. The share of unemployed workers who've been out of work for 27 weeks or more. That number has surged from about 18 percent a year ago to nearly 23 percent in the latest data. Luna: Twenty-three percent. So almost one in four unemployed workers has been jobless for over six months. Lucas: Exactly. And that's happening while the overall unemployment rate is basically at full employment — 4.3 percent. It's a really weird divergence. Normally when the jobless rate is that low, long-term unemployment shrinks. People find jobs. But that's not what's happening. Luna: So what's driving it? Because the JOLTS data just came out and job openings surged to 7.6 million. That's up from 6.9 million the month before. So it's not like there aren't vacancies. Lucas: Right, that's the puzzle. Openities are way up, quits are stable, initial jobless claims ticked up a bit to 225,000 but nothing alarming. And yet the long-term unemployed aren't getting reabsorbed. The structural explanation is that there's a mismatch between the skills employers want and the skills these workers have. But I think it's also a story about who's getting laid off and who's getting hired back. Luna: Give me the concrete example. Who are we talking about? Lucas: Think about the sectors that shed jobs in the last two years — tech, media, parts of retail and manufacturing. A lot of those were mid-career workers, people in their 40s and 50s. They got laid off in waves. And now the hiring is happening in health care, hospitality, government — different skill sets, different pay scales. A 52-year-old former IT project manager isn't going to take a 35,000-dollar-a-year hospitality job easily. They stay in the pool longer. Luna: And meanwhile, the jobs that are being created are often lower-paying or part-time. The average hourly earnings number — 37.50 an hour — that's up, but it's pulled up by composition. Low-wage workers are getting hired, and high-wage workers are staying unemployed. Lucas: That's exactly the dynamic. So the headline unemployment rate looks fine because the people who are getting jobs are the ones who were already in the pipeline. But the long-term unemployed — they're falling out of the labor force or they're stuck. And that's a problem for the Fed. Luna: Because the Fed watches the unemployment rate and wage growth to decide on rate cuts. If the headline looks solid, they might hold off. But the underlying fragility suggests the economy isn't as strong as it appears. Lucas: Precisely. And that's what makes tomorrow's jobs report so interesting. If we get 190,000 jobs and 4.3 percent unemployment, the market will cheer. But if the long-term unemployed share keeps rising, that's a signal that the labor market is healing unevenly. And the Fed's rate-cut path — which right now the market is pricing in a cut in September — that could get complicated. Luna: It's the kind of number that doesn't make the front page of the jobs report summary. You have to dig into the tables. Lucas: Exactly. Table A-12 in the BLS release. Duration of unemployment. That's the table I'll be looking at first tomorrow morning. Luna: You know, it's funny — we talk about the economy every day on this show, and we try to make it accessible. No ads, no sponsors, just a conversation about what the numbers actually mean. Lucas: Yeah, and we love doing it. If you find these macro deep dives useful, and you want to support keeping it ad-free, the simplest way is buy me a coffee dot com slash fexingo. No pressure at all, but it helps us keep the show independent. Luna: Totally. And now back to those long-term unemployed numbers — because I want to talk about what happens if this trend continues. Lucas: Yeah, let's project it out. If long-term unemployment stays at 23 percent or goes higher, then even if the unemployment rate ticks up to 4.5 or 4.6 percent, the composition gets worse. You'll have a growing share of workers whose skills are depreciating, whose networks are shrinking, whose confidence is eroding. That's the scarring effect. Luna: And that scarring effect is exactly what the Fed wants to avoid. Chair Powell has mentioned it in press conferences — the risk that long-term unemployment becomes structural and the economy loses productive capacity. Lucas: Right. And there's another data point that connects here. The 10-year breakeven inflation rate is at 2.36 percent — basically anchored. So inflation expectations aren't running wild. That gives the Fed room to cut if they see the labor market softening. But they need to see it in the right places. Luna: And the Fed's effective rate is 3.63 percent. The market is pricing in cuts, but if long-term unemployment is rising because of mismatch, not because of weak demand, then cutting rates won't fix it. You can't lower interest rates to give a laid-off software engineer the skills to become a home health aide. Lucas: That's the critical distinction. If the long-term unemployed were simply victims of weak aggregate demand, the Fed could juice the economy and they'd get hired. But if it's structural — if they're in the wrong sector, wrong geography, wrong skill set — then monetary policy is the wrong tool. You need training programs, relocation assistance, maybe even wage subsidies. Luna: So the Fed is stuck. If they cut rates because they see a rising long-term unemployment share, they might be using a hammer on a screw. And if they hold steady, they risk letting the scarring get worse. Lucas: Exactly. And that's why I think the long-term unemployed number is the most important hidden signal in the labor market right now. It tells you more about the health of the economy than the headline unemployment rate. Luna: Let's look at the recent ADP data — private payrolls grew by 122,000 in May, which was stronger than expected. But that's mostly in services. Goods-producing sectors are flat. So the jobs that are being created are in the sectors that tend to hire younger or lower-skilled workers. Lucas: Right. And the JOLTS surge to 7.6 million — that's a big jump. But look at the industry breakdown. Health care and social assistance accounted for a huge chunk. Manufacturing openings actually fell. So the mix matters. Luna: And those health care jobs — they require certifications, background checks, often specific training. An unemployed factory worker can't just walk in. Lucas: No. And that's the friction. So we have this weird economy where there are plenty of job openings, plenty of unemployed people, but they're not matching up. And the longer that mismatch persists, the more the long-term unemployed become permanently detached. Luna: What about the people who drop out of the labor force entirely? The participation rate has been stuck around 62.5 percent for months. Some of those long-term unemployed just stop looking. Lucas: Absolutely. And once they're out, they're not counted in the unemployment rate at all. So the 4.3 percent number actually understates the slack. If you add back the discouraged workers, the true labor underutilization rate — the U-6 measure — is probably closer to 8 percent. Luna: That's a huge difference. So when the market sees 4.3 percent unemployment and thinks 'tight labor market, no rate cuts needed,' they might be missing the real story. Lucas: Exactly. And that's why I think the May jobs report tomorrow could be a real market mover — not because of the topline number, but because of what the internals reveal. If the long-term unemployed share ticks up again, that's a bearish signal for the economy but potentially bullish for rate cuts. Luna: So what are you watching for specifically? The share of unemployed 27 weeks and over, and the change in the number of people unemployed for more than a year? Lucas: Exactly. The very long-term unemployed — those out of work for 52 weeks or more — that number has been creeping up too. It's still small in absolute terms, but the trend is unmistakable. If that accelerates, it's a flashing red light. Luna: And then there's the initial jobless claims number — 225,000 last week, up from 212,000. That's still low by historical standards, but the trend is edging up. If claims keep rising, that could be the first sign that layoffs are broadening beyond tech and media. Lucas: Right. So you have a few arrows all pointing in the same direction: rising long-term unemployment, rising claims, a participation rate that won't budge, and wage growth that's driven by composition rather than broad-based bargaining power. The economy isn't falling off a cliff, but it's definitely more fragile than the headline numbers suggest. Luna: And that's the kind of nuance that gets lost in the 30-second news hit. We have the luxury here to dig into it. Lucas: We do. And I hope listeners come away from this episode looking at Friday's jobs report with a more skeptical eye — not cynical, but paying attention to the right tables. Because the headline number is just the beginning.