Jobs Friday Brings Bad News, But the Labor Market Will Be Ok
Sometimes economists grossly overestimate. Friday’s jobs report from the Department of Labor took analysts by surprise; the United States economy created only 142,000 jobs in August, not the 230,000 jobs expected. The government downwardly revised job creation in both June and July by a combined 28,000, meaning the labor market is not as strong as previously thought. Sure, the headline unemployment rate ticked down one percentage point to 6.1 percent last month, just as predicted. But that decrease was due to workers dropping out of the labor force, as has been the case throughout much of 2014, with the notable exception of April. When tabulating the headline unemployment rate, the government only includes people that are actively working for look, meaning the jobless figure can decrease because job seekers find work or give up the search.
One of the key indicators that the United States labor market is far from healed is the labor force participation rate — the share of working-age Americans who were employed or looking for work. When the percentage of jobless Americans increased slightly in July, the uptick was thanks to unemployed workers returning the labor force — a sign of confidence in the job market. August’s drop in the unemployment rate came from a sizable decrease in the labor force, meaning workers were still discouraged and unable to find employment. That aspect of the jobs report was by no means surprising; a disheartened labor force and a record low labor force participation rate has characterized the recovery and is evidence that recovery has not yet reached all Americans.
In August, the number of Americans reporting they were employed did increase slightly. However, the majority of the 80,000-person, 0.1 percentage point decline in unemployment was the result of people leaving the labor force. For the 49th time in the past 50 months, more workers dropped out of the labor force than found jobs, leaving the labor force participation rate at 62.8 percent. Together, the aging of the baby boomer generation, the discouragement of job seekers, and a lack of new entrants has shrunk the United States’ workforce to nearly the lowest level since 1978.
There is good news; focusing on the prime-age working population, or those Americans between 25 and 54, reveals improvements in labor force participation and employment. The number of Americans marginally attached to the workforce — meaning they want to and are available for work, but have stopped looking — has decreased by a modest 201,000 to 2.1 million, suggesting that fewer people are involuntarily out of the labor force.
So What Happened to the Jobs Recovery?
The fact that U.S. employers created fewer jobs than expected indicates that the economy is a bit weaker than previously believed.
Here’s the good news from today’s jobs report: 1. These are noisy estimates 2. They’ll probably be revised 3. It could have been worse. — Justin Wolfers (@JustinWolfers) September 5, 2014
But while August’s Employment Situation Report cannot be described as good, it should not cause economists to radical reassess their expectations for future growth. Or in other words, there may cause for disappointment or even concern, but no reason to panic. August did represent the weakest month of job gains so far this year, but the headline numbers need context. With job creation data, it is important to distinguish the signal from the noise. As Wolfters — a Brookings Institution economist — suggests, the headline numbers are distorted by what is known as noise. When the Labor Department calculates job creation numbers and the unemployment rate, it relies on two polls. A mid-month survey of households to tabulate the number of workers receiving pay for the week in question, which determines the unemployment rate, while job creation is figured by questioning public-sector employers and private companies. But the survey method can create statistical noise.
For example, FiveThirthyEight’s Ben Casselman has argued that the decreases in the number of long-term unemployed Americans is the result of fewer people searching for employment. But a July 21 research paper from Federal Reserve economists notes that the long-term jobless are faring better than commonly believed, as the drop in the rate of long-term joblessness over the past eight months has coincided with a stable labor force participation rate and an improving employment to population ratio. The reason for the disparity in these two assessments of the health of jobless Americans comes down to how data is collected. The Labor Department tracks 60,000 households for four consecutive months in order to keep track of the changing employment status of those individuals. After that period, those households cycle out of the survey for eight months before they are polled once again. The data shows that the percentage of long-term unemployed Americans finding jobs on a monthly basis has barely increased since the worst of the recession.
But when changes in the share of long-term unemployed are examined on a yearly basis — and remember households are included in the Labor Department survey for one four-month period per year — a different reality emerges. Statistical noise — caused by workers who stop and then return to the job search or take a temporary job — exaggerate the number of workers dropping out of the labor force on a monthly basis, meaning annual numbers show a clearer trend of improvement. According to government data, the odds that a long-term unemployed worker will have a job the following year are now as high as they were before the recession. Still, Casselman is not convinced by that “interpretation.” He argues that while those Americans who were jobless for more than 27 weeks saw their employment prospects improve significantly in 2010, gains have been much more modest in subsequent years. While there appears to be an increase in their job-finding rate over the past six months, “it’s hard to tell whether that’s a trend or just statistical noise.”
Even when the general trend of job creation is healthy, an occasional month will see lower-than-usual numbers, thanks to statistical noise or normal variations in the hiring practices and labor needs of employers. Both of those factors keep monthly job numbers volatile on a regular basis. Plus, the margin of error on the Labor Department’s headline payroll number is approximately 90,000 jobs.
Examining the long-term labor market trend shows steady, not accelerating, job growth.
Is There Any Good News?
While jobless levels are far higher now than before the recession, unemployment, and particularly long-term unemployment, is falling. Fewer Americans are working part-time because they cannot find the full-time employment they need; and the construction sector — which serves as a gauge of economic health as well as a source of high paying jobs — experienced strong gains for the second consecutive month.
Yet there is little evidence that job creation will accelerate in the remaining months of the year. For the fifth straight month, the average workweek remained unchanged at 34.5 hours, while wages increased by only 6 cents per hour in August and grew just 2.1 percent over the past 12 months, a pace that is historically extremely low. Stagnant wage growth and no change in the length of the average workweek mean employers have not experienced any significant growth in consumer demand, growth that is essential to the expansion of payrolls.
August’s Employment Situation Report also contained ambiguous news for the type of jobs employers are creating. Throughout the recovery, job gains have been concentrated in low-wage industries like hospitality. Comparatively, the majority of jobs lost in the recession were skilled, high paying positions. In the past several months, a number of industries — including construction and health care — have seen strong job creation numbers, but still, in August, one-fifth of all new jobs were in the low wage sectors.
There is always this to keep in mind:
The Jobs Report Did Give Washington More to Fight About
Speaker of the House, Republican John Boehner of Ohio, took the opportunity the jobs report presented to criticize the president and his methods.
“Today’s disappointing report, coupled with last week’s bleak economic forecast from the Congressional Budget Office, shows a pattern of weakness in the Obama economy that has too many Americans still asking, ‘where are the jobs?’ Republicans have listened to the American people and advanced solutions to help create more jobs … but our common sense solutions have run up against a brick wall in the Senate, where Democrats are more worried about keeping their jobs than helping families find work.”
To be clear, the CBO report referenced by Boehner, released August 28, explained that the nonpartisan agency “anticipates that, under the assumption that current laws governing federal taxes and spending generally remain in place, the economy will grow slowly this year, on balance, and then at a faster but still moderate pace over the next few years.” The White House framed the jobs report much more positively than Boehner. A press release issued Friday morning highlighted the fact that in August the “private sector has added 10 million jobs over the 54 straight months of job growth, extending the longest streak on record.” The last time the U.S. economy added 10 million private-sector jobs over a four-and-a-half-year period was between November 1996 and April 2001. But the release also noted that, “Despite the progress that has been made, the President believes more must still be done to support the recovery and job creation,” primarily because the economy is no where near as strong as in was in the late 1990s. Plus, long-term unemployment still remains elevated by historical standards. It is worthwhile to note that a large share of Americans are disheartened about the health of the labor market.
Pew Research found that 58 percent of Americans say jobs are difficult to find, while only 33 percent say employment is readily available where they live. Still, the share of Americans more confident about their job prospects has increased six points since April and steadily increased from the 10 percent recorded in the spring of 2010. Gallup has also reported that Americans’ satisfaction with job security has returned to high pre-recession levels.
What Will the Federal Reserve Do With This Data?
This jobs report contains no clear roadmap for Federal Reserve policymakers attempting to measure the health of the labor market, and by extension, the need to keep interest rates low and the feasibility of tapering the central bank’s stimulus program further. Likely, Chair Janet Yellen will see the August Employment Situation Report as evidence that the labor is “still struggling” and no where near overheating just yet. Yellen’s primary concern is slack. High number of underemployed Americans, stagnant wage growth, the large share of the unemployed who have been out of work for six months or more, and the record low levels of labor force participation are all indications of labor market has a great deal of slack, and therefore, is far from full health.
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