The Impact of Record-High Stock Market on Unemployment Rates
How the Stock Market is Linked to Low Unemployment Rates
Historically low unemployment rates can be attributed to the record-high stock market, according to experts. A strong economy, reflected in the equity market, is typically associated with a fully employed labor market. This correlation can be found in college textbooks and is widely acknowledged by economists.
A Shift in Retirement Goals
The wealth accumulated by older workers due to significant gains in asset prices has allowed many of them to retire. The value of their securities portfolios and homes has been boosted by stimulative monetary and fiscal policies implemented in response to the Covid-19 pandemic. As a result, the labor-force participation rate of individuals over 65 has decreased and is not expected to rise again. On the other hand, labor-force participation rates among those in their prime working years have recovered and surpassed pre-pandemic levels.
The Impact on the Labor Force
Economists Miguel Faria-e-Castro and Samuel Jordan-Wood have found that the strong performance of asset returns in 2020-2021 can explain a significant number of retirements, particularly among those nearing retirement age. The S&P 500 index experienced a real return of over 35% from December 2019 to December 2021, while housing saw a real return of close to 20% during the same period. Although factors such as health concerns or caregiving responsibilities may have also influenced retirements, the increased wealth of those aged 65 and older compounded the effect of these nonfinancial factors.
Delayed Retirement for Some
In contrast, older age groups, specifically those between 55 and 64 years old, are working at higher rates than before the pandemic. This suggests that they have had to postpone retirement due to not benefiting as much from the asset inflation seen in recent years.
Permanent Loss of Experience and Skills
The January 2024 employment report reveals that there are approximately 828,000 fewer workers over 65 compared to February 2020. Jefferies economist Thomas Simons expresses concern over this decline, stating that it is unlikely for a significant portion of these individuals to return to the workforce. This absence of experienced and skilled workers is believed to contribute to the weak productivity growth experienced by the economy since 2021.
The Trade-Off of Retirement Wealth
While it may be advantageous for individuals to retire based on the wealth generated by the stock and housing markets, the absence of these seasoned workers has resulted in a less productive U.S. economy. The long-term impact of this shift in the labor force remains to be seen.
Analyst comment
Positive news: The historically low unemployment rate owes partly to the record-high stock market, as older workers have been able to retire due to increased wealth from asset prices. The labor force participation rate among prime working years has recovered and exceeded pre-pandemic rates.
Market outlook: The absence of retirees represents a permanent loss of experience and skill, contributing to weak productivity growth. The market may see a slight decrease in productivity due to this trend.
