What Underemployment Means for Markets

Last week’s widely watched US jobs report showed hiring surged in September, extending this year’s growthy trend. But some have doubts about the jobs landscape. A frequent concern we hear: The jobs numbers don’t reflect reality. Some say many Americans are too discouraged to look for work—and dropping out of the labor force—or are “underemployed,” forced to rely on the “gig economy” (e.g., driving for rideshare or food delivery services) to make ends meet. If the unemployment report better captured gig work, they argue, the true underlying shakiness would show. We understand the concern—which isn’t new—but it seems misplaced. In our view, its return is more a sign the pessimism of disbelief remains prevalent than a reason to doubt the economy’s prospects.

The Bureau of Labor Statistics (BLS), which produces the jobs report, has myriad ways to track those in and not in the labor force. It isn’t a black-and-white count of those with a job and those without. For example, there is the labor force participation rate, which reflects the percentage of the population that is either working or actively looking for work. On the “labor underutilization” front, the agency identifies population segments ranging from “discouraged workers” to those “employed part time for economic reasons.”^[i] Note, too, the BLS accounts for underemployment and those dropping out of the labor force with its U-6 rate, the broadest measure of unemployment. This was at 7.0% in September, higher than U-3’s (the official unemployment rate) 3.8%.^[ii]

That said, the agency lacks a comprehensive measure of the gig economy—it doesn’t even have an official definition—and has acknowledged the difficulties in tracking workplace changes, especially after the pandemic. The BLS has a survey of “contingent and alternative employment arrangements,” but it isn’t conducted monthly (an updated version is set to be released next year). Beyond measurement limitations, we don’t dismiss the labor market’s prominent soft spots. For example, policymakers have long fretted over the long-term slide in prime-age males’ labor force participation rate—which some past and current Fed heads have tied to the opioid crisis (though others suspect the causality is reversed).

We understand how personal jobs are, as their meaning can extend beyond finances. But concerns about the type of work people do are mostly sociology. For our purposes, a sociological issue affects our social, political and societal relationships. There may be some ties to the economy, but there isn’t a direct link to economic trends—which is why such matters don’t meaningfully affect stocks’ supply and demand drivers. Consider: Stocks care about a company’s ability to make money over the next 3 – 30 months. They don’t care whether the firm’s workers are full time or part time, old or young, male or female—or even sentient (robots work, too). Rather, what matters most is the company’s profitability now and in the foreseeable future. The workforce makeup can affect this at the margins, but it isn’t a primary driver, in our view. We realize this sounds callous—and, to reiterate, we aren’t saying sociological matters are unimportant.^[iii] But markets are cold-hearted, so when making investment decisions, people benefit their portfolio by viewing the world as markets do.

Today’s concerns about underemployment and the gig economy aren’t new—we have seen different versions over the years. Back in the mid-1980s, Americans bemoaned “McJobs”—a reference to low-paying jobs in the restaurant industry with limited opportunities for career advancement. In the early-2010s, worries about part-time work were rampant (yah people are working, but they need several jobs to make ends meet). The focus on the quality of jobs (which is subjective) instead of the rising number of working people signals some broader doubts about the economy, in our view—as if “poor quality” jobs, whatever that means, hurt growth.

Yet history has proven those worries wrong. McJobs fears came onto the scene in the mid-1980s, but that didn’t stop the prime-age labor force participation rate from rising over the next 13 years to its all-time high in 1999.^[iv] The prime rate fell during the first half of the 2010s as worries about part-time work picked up, but after hitting a late-2015 trough, it rebounded, climbing until 2020’s lockdown-induced recession.^[v] We think it is easy to see people get discouraged early in the economic cycle, especially since the job market is a late-lagging indicator. But an expansion usually pulls more people into full-time work than many expect—thereby pulling individual workers onward and upward in their careers. That career progression isn’t a market driver, mind you, but over time, the jobs market eventually reflects the economy’s growth.