The Dividend Cafe - When Labor Market Reality and Cultural Crisis Become One

Episode Date: September 26, 2025

Today's Post - https://bahnsen.co/4muX6jX Analyzing America's Labor Market: Cyclical vs. Structural Issues In this week's Dividend Cafe, host David Bahnsen discusses the United States labor market, emphasizing the distinction between cyclical and structural challenges. He explores the unemployment data, noting historically low rates yet a significant rise in labor inactivity among prime working-age men. David highlights the supply-side issues in the labor market, including potential cultural factors and the impact of social safety nets, particularly disability benefits. He stresses the need for structural solutions and their implications on economic policy and the broader society. The episode concludes with a preview of next week's meetings with money management partners in New York. 00:00 Introduction and Upcoming Events 01:04 Current State of the Labor Market 02:59 Cyclical vs. Structural Economic Challenges 05:23 Unemployment Trends and Historical Context 06:28 The Supply Problem in the Labor Market 08:39 Inactivity Rates and Labor Participation 13:23 Cultural and Policy Factors Affecting Employment 20:20 Conclusion and Final Thoughts Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, weekly market commentary focused on dividends in your portfolio and dividends in your understanding of economic life. Well, hello and welcome to this week's Dividend Cafe. I am your host, David Bonson, coming to you from New York City and very excited for the third quarter to come to an end next week. I will spend next week with my partner Brian Sightel, our director of investment solutions, Kenny Molina, the three of us will once again, this is actually the 20th anniversary of an annual money manager week that I've done in New York City. And we will spend next week in about 20 plus

meetings with various money management partners will devote next week's dividend cafe to me sharing some of the key insights from the week. What we anticipate to be very very, very candid and very, shall we say, deep dive conversations with managers across all sorts of asset classes and categories of the economy. We think that it's going to be very informative to our own process. It always is. And I think that sharing some of these things in the Dividendon Cafe next week will be useful to you.

Today's Dividend Cafe, speaking of useful to you, is a little bit different than what we often do. and it's even different than its own title and category would suggest. When you say, I'm going to talk today in the Dividendon Cafe about jobs, about the labor market, there is a very understandable connotation about the current state of the labor market and what it means to our economy. And that is, in fact, how I have approached it in very recent dividend cafes. Some of the more recent vulnerability in the BLS monthly jobs data, the ADP monthly jobs data, the weekly initial jobless claims, those things in tandem with questions about the impact of tariffs have all led to this sort of curiosity about cyclical economic features. are we cyclically facing some downturns with labor market vulnerability?

We largely judge an economy like the United States with 330 million people and tens of trillions of dollars of annual output in the connotation of employability, how many jobs were able to create and what kind of job growth and wage growth were generating. And by doing it that way, which is a very fair and a very fair and a very fair. appropriate cyclical measurement, we get to see how structurally healthy the United States economy has mostly been. I've written a couple dividend cafes recently suggesting why we're so structurally healthy. Our marriage to a free enterprise system and a free enterprise ethos with robust capital markets and a celebration of the things that make a free enterprise system

work has served us well culturally and, of course, economically for 250 years. But when we talk about economic challenges in America, we generally, almost always, have been talking about cyclical challenges because when we face rising unemployment, it corrects soon. Now, that doesn't help the people going through it. Soon can be a relative term. Some recessions have been longer than others. But the very diverse and dynamic nature of our economy is different than many other countries where when we have a cyclical downturn in certain aspects of labor, it doesn't torpedo the entire economy in a structural, permanent way. We have the ability to recreate, to reinvent, to replenish. And there's plenty of debates that can be had about how to

treat recessions, what to do during recessions. The predominant school of thought for a little over 75 years now has been Keynesianism that believes you treat recessions with government interventions to provide a fiscal counterpunch to cyclical downturns. There are people, and I'm one of them, who vehemently disagree with that and believe that trying to treat a recession with intervention often exacerbates a problem or creates a new one. That's perhaps another Dividing Cafe I've most certainly spoken about it and written about it in other venues many, many times, and I will the rest of my life. But for our purposes today, that's not really my point.

Regardless of how you think a recession should be treated, we're blessed in the dynamic robustness of the American economy that most of our recessionary issues are transitory, cyclical, and that we have the ability in periods of rising unemployment to get our people employed again. purging out malinvestment, working through some of the excesses that a recession is trying to purge out. Those things have to happen at times when it's a full-blown credit crisis, like the great

financial crisis in 2008, when it was the Great Depression, we're not totally immune from the possibility of deflationary spirals. But my point being that we generally look to the unemployment data, not because we wonder if it's about to ruin America, but because we wonder. if it's speaking to a cyclical challenge. And we right now are living in a period of about 4% unemployment. It's been between 3.5% and 4% since the years after the financial crisis. That's historically very, very low.

We've averaged about 5.7, maybe 5.8% unemployment for 50 plus years. And we've been well below that for quite some time. That is all a good thing. Now, whether or not we are facing the cyclical challenge that I talked about at the beginning and I did a dividend cafe on about a month ago, whether or not the tariff issues combined with BLS revisions, are we facing some job market vulnerability as the current hiring freeze, what appears to be in tandem with a firing freeze, where that tips? I don't know the answer, but I would suggest that this whole discussion speaks.

to the fact that we are very used to in our country referring to labor issues as a demand problem. Do we have enough demand from employers, from companies, from businesses, from economic opportunities for workers? And I think that we are ignoring to our own peril the supply problem, the supply problem, the supply of workers to meet job needs, opportunity needs, employer needs. This reversal is extremely important where we sit right now in history. And whereas most demand-oriented issues are short-lived and cyclical, as I've spoken about, we appear to be entering a structural issue of supply shortage of workers or a supply contraction that is not necessarily proving to be transitory or short-lived. So there's a chart we're going to put up right now in the video showing the

annual employment rate in the United States. And you can see here in the last several years that three and a half to four percent range. Now obviously there's some spikes in other parts of the chart that are particularly higher and those generally refer to periods of a bad recession. You see the COVID spike for a minute. You see the more prolonged financial crisis. But note that in the financial crisis, we stayed elevated between 6 and 10% for several years, from 2009 all the way to about 2015. And where it is settled, it not only settled lower, but than that, it settled lower than what it had been, basically, since my childhood. that even in periods of really good economic growth in the 80s and 90s,

nobody talks about the 80s or 90s as bad economic periods once you got past that 1982 recession. But we had basically unemployment that was structurally in the 5 to 6% range, not 3 to 4%. This seems like it's a good issue. But what I think we have to address now, and we'll put a new chart up here, indicating the inactivity rate.

The inactivity rate is working-age population that is not in the labor force at all. It essentially refers to people who are working age that either don't have a job or are not looking for one. And here you see a very steady increase in this number over the last 15 to 20 years. We won't put it up on the monitor,

now, but in Dividing Cafe, there's also a chart of the labor participation force, which is essentially kind of an inverse. One is measuring those who are becoming active. One is measuring those who are active, and that is with a job or looking. But what I really wanted to do is get noise out of the data to test the hypothesis that we might be facing a new structural challenge. When we had a lot of time in the past where there were less women in the workforce and there's a lot more women in the workforce now, we want to avoid apples to oranges comparisons. When we just isolate the data to women only past child rearing years, you have the highest activity, the lowest inactivity we've ever seen. when you isolate the data to prime working years, 25 to 54, then there is the highest activity and labor participation for women we've ever had.

Now, those numbers on an absolute basis are lower because in the 20s and 30s are where there are oftentimes women leaving to have children or staying out of the workforce for a period of time or whatever it may be. But the point being, there's enough anecdotal numbers around. to verify, we're not facing an issue of total aggregate decline in activity in labor participation with women. It's the opposite. Likewise, I could put charts up that reflect people under 25, which I think is important. I think the metrics around teenage employment, part-time employment, college-age students who have part-time jobs, I think all of that matters culturally and economics.

But again, it's measuring a different thing, just like a lot of the post-prime working age years measures a lot. Now, what is that, quote-unquote, time in which a lot of people are retiring? We've historically referred to it as age 65, and certainly the inactivity rate goes higher at people over 65. But the inactivity rate for prime working age of men has gone from essentially 3% 60 years ago, to 11% now. And when you look at these metrics divided by, or excuse me, applied to 65 million men that are between ages of 25 and 54, you're getting 7 million men that are not in the workforce or that are not looking for work, okay?

That, to me, captures this entire increase in total inactivity and decrease in labor participation. When people say, well, it might be related to retirees, but those numbers are isolated in 2554, the numbers above 65 have been at that level, and we have had plenty of baby boomers that are retiring, and then now there's more mortality at later senior ages, but then there's more people entering the workforce that cyclically is accounted for in the data. Isolating to 25 to 54 allows me to do a pure apples to apples comparison. And when we see an explosion of inactivity, it behooves us to ask the question, why?

I'll put a chart up here now doing just that. An inactivity rate at a stunningly high 11%. And I would say that this, to me, allows us to ask some questions. By the way, we do have data isolated for people from 55 to 64. That's older than prime working age, younger than what we historically think of as retired, and even that sees a huge spike amongst men in activity, I believe 27.5%. Now, maybe a lot more people are retiring earlier, but there's a lot of other statistical evidence suggesting, again, a sort of voluntary inactivity and other kind of coincident indicators

that we're facing something different structurally than we faced in the past. So at the end of the day, the hypothesis that many have had is that we might be facing something culturally. There's a link in Divida Cafe to a 75-page white paper. I read every word of when it first came out, studied the data immensely before I wrote a book called Full Time a number of years ago about my own theology. of work and revisited a lot of that data this week at the absolute stunning increase in disability claims in a period of much better health, much improved mortality from an age

demographic that is not increasingly exposed to infirmity or disability, that the lion's share of the increase is not exclusive, but very close to 100% in the mental and emotional category, not physical. It speaks to a heavy coincidence with the Disability Benefits Reform Act, vastly loosening conditions for eligibility, big increase in public disability payout, big increase in private disability payout, and the idea that we do have an increasing number of men who do not want to work. we have 58% of men between the ages of 25 and 54 who are married. 37% of the inactivity in that bracket are from unmarried men.

So you essentially have a very disproportionate correlation of unmarried men that are choosing to be out of the workforce. with an increasingly generous social safety net. The very hard part for an economist to get into these macro data points is that we are totally aware of the fact that there are micro cases that do not require any justification or rationalization or apology. There are legitimate, tough situations of disability, of medical, of any number of circumstances that keep people out of the workforce. But with macro, you're not looking at those individual cases.

You're trying to question why something, to the tune of millions of people, would have changed. And absent a better solution, I believe we've gotten to this totally devoid of a chicken or egg need, a negative feedback loop, whereby there is a greater access to social safety net promoting greater. inactivity and greater inactivity promoting a greater social safety net. There is a greater, shall we say, a declining appetite for strong families, feeding an appetite for a labor inactivity and a labor inactivity that creates a self-fulfling prophecy of lack of robust families. I'm identifying both a policy negative feedback loop and a cultural negative feedback loop that is, to me, the lowest hanging fruit of what plagues the soul of our society.

There are plenty of things people could get to and within various particular demographic groups and whatnot. But the data on this subject does not suggest and, in fact, is counter suggestive of it being geographical or race or even educational attainment oriented. There's an incredible proportionality in movement amongst the various groups that help exclude other explanations. I did a divinity cafe, I think it was almost two months ago now, about the plight of manufacturing in America, pointed out the big disconnect between available manufacturing jobs and manufacturing workers. I don't believe that most of the things people propose as explanations for these things on highlighting make any sense. But what really doesn't make sense, it matters to us as investors, and matters to the way we do economic analysis, is this. We are still approaching almost all discussion of the American jobs market as a demand problem.

Even when people talk about AI, they talk about a problem we don't yet have. What if AI eliminates the demand for workers? We talk about universal basic income as a solution to a problem we do not have. which is that there's all these workers that are unable to find work. These are demand-oriented discussions, and we are not having supply-oriented discussions. How do we increase the supply of workers? And much like I would not recommend Europe approach its declining spirituality by building more church buildings when they don't have people going into the church buildings. I do not believe America solves its worker problem by building more factories. If I'm right that we have a

supply problem, not a demand problem, we ought to look at the source of the supply problem and see what solutions may exist. And some of them may be in the policy sphere. I do very much believe that on a totally nonpartisan basis, we ought to be looking at some form of social safety net reform, and particularly disability reform. And then when you get outside of the sort of policy realm and look at the cultural dynamic, I believe that promotion is strong of families is highly coincident with greater activity and declining inactivity in the jobs market. Those areas strike me as far more economically potent, approaching our labor issue structurally around a supply, issue as opposed to the demand side.

Cically, there's always questions about up and down movements and unemployment that are indeed demand-related. But the bigger issue, if we're not talking about next month or next quarter, which very candidly, most people aren't even looking at that for economic reasons. They're looking at it for political reasons. If we want to look at a structural economic issue that matters to the soul of America, as well as our own national economic pocketbook, I suggest we start thinking long and hard

about structural solutions to a supply problem, the supply here being workers, particularly men of prime working age. This to me is a very important issue in the Dividing Cafe. Thank you, as always for listening, watching, and reading the Dividend Cafe. I welcome your feedback. Encourage you to look at other charts that didn't make the screen today

that are at Dividendoncafe.com. Looking forward to a very busy and provocative and intellectually stimulating week next week here in New York. Thanks again for being a part of Dividing Cafe. The Bonson Group is a group of investment professionals registered with High Tower Securities LLC, member FINRA and SIPC,

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