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Employment Weakens, but Payroll Processors Are Cheap--Page 2

Not all firms are impacted equally by deterioration in the employment situation.

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The final chart we'd like to discuss is a comparison of the unemployment rate and the duration of unemployment. In our opinion, a spike in the unemployment rate won't necessarily translate into a reduction in demand for payroll processing services, at least not in the same magnitude. To make our reasoning clear, we first have to define the unemployment rate. According to the BLS Web site, unemployed persons are defined as "people aged 16 years and older who had no employment during the reference week, were available for work, except for temporary illness, and had made specific efforts to find employment sometime during the four-week period ending with the reference week." The last part of that sentence is key: If you don't have a job but haven't looked for work in the last month, you are not considered unemployed according to the unemployment rate. The impact of this definition is portrayed in the chart below.

As you can see, the median duration of unemployment (in weeks) was coincidentally about equal to the unemployment rate for many years, but it has diverged significantly since the mid-1990s. The 20-year moving averages (represented by the dashed lines) show that the duration of unemployment has steadily ticked up while the unemployment rate has ticked down. In other words, the unemployment rate has been falling partially because people are finding jobs, but also because it's taking longer for many people to find work. This brings us to an important attribute of the unemployment rate that is often overlooked: It's driven by both demand and supply. If the supply of aggressive work-seekers increases (let's define aggressive as active in the last four weeks) but the number of jobs stays the same, the unemployment rate increases.

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Joel Bloomer does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.