The Virtue of a Summer Job
The post-pandemic recovery continues to baffle economists. In May, the U.S. economy added 339,000 jobs, far greater than the 180-200,000 than analysts had predicted. Adding to the upside surprise: the two previous months were revised higher, amounting to an additional 93,000 than originally reported. Remarkably, we have seen average monthly job creation of 341,000 over the past year.
But there was a warning in the household survey: the unemployment rate increased by 0.3 percentage points to 3.7 percent. While the rate has remained in a tight range of 3.4 to 3.7 percent since March 2022, this month’s increase was due to a combination of the labor force increasing by 110,000 and the addition of 440,000 unemployed Americans, which together amount to a 310,000 drop in employment.
Bill Adams, Chief Economist for Comerica Bank believes that despite the strength in the headline job gains, the May report signals “the long-expected softening of the labor market.” In addition to the rise in unemployed people, Adams cites “the average workweek shortening [to the lowest level since the Covid low in April 2020], average weekly earnings flat on the month, and aggregate hours worked across the private sector basically flat since January,” all of which indicate that “the job market has softened”.
Before we jump down the rabbit hole of despair, Paul Ashworth of Capital Economics cautions “against reading too much into that one-month decline in the more-volatile household measure, particularly when it was driven by a drop in reported self-employment.” That said, Ashworth believes that the report will allow the Federal Reserve to pause its rate hike campaign, as officials have telegraphed over the past several weeks, in order to better determine how the economy is absorbing the highest level of fed funds rate in 16 years.
The still-solid labor market should be good news for young workers who are seeking summer employment. Last year, the youth labor force (16-24) grew by 2.6 million (12.9 percent) between April and July. While the idea of flipping burgers, twirling lifeguard whistles, or babysitting may seem trivial, when young people earn money, they are thrust into environment where they are able to develop core personal finance skills, which is why I often recommend ditching summer educational programs and instead encourage high school and college students to work. Here are some of the basics that I hope they learn, perhaps with the coaching or mentoring of a relative or a family friend:
Decoding a Paystub: Remember the first time you saw FICA and wondered, “Who’s FICA”? So much of the tax code is embedded in that first paystub. Young workers should learn about the difference between gross pay (before taxes are taken out) and net pay (the amount you take home) and why the boss is withholding a slew of taxes, including: federal, which helps fund the nation’s military; state and local, which pays for schools and road maintenance; and payroll or FICA, which includes Social Security and Medicare, programs that help sick and elderly Americans.
Opening a Bank Account: After the banking meltdowns of this spring, now is a good time to open and understand how banks work. A new account is an opportunity to elaborate about compound interest, FDIC insurance, electronic bill paying, and bank fees (i.e., minimum balance and overdraft protection). Start an automatic savings program so that at least 10 percent of summer earnings is directed into a savings account. (Parents may want to link kids’ accounts to keep an eye on what’s going on and to transfer money to the account seamlessly in the future.)
Saving for Retirement: Even if the amount is small, open a Roth IRA account to instill the concept of retirement savings. Explain that a Roth IRA allows the money earned to grow tax-free for life. Some parents add an incentive, by matching their kids’ contributions dollar for dollar. You can experiment with different amounts of savings and interest rates by using a compound interest calculator at investor.gov.