Meet the Author

Timothy Dunne |

Vice President

Timothy Dunne

Timothy Dunne is a former vice president and economist of the Federal Reserve Bank of Cleveland.

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Meet the Author

Kyle Fee |

Economic Analyst

Kyle Fee

Kyle Fee is an economic analyst in the Research Department of the Federal Reserve Bank of Cleveland. His research interests include economic development, regional economics and economic geography.

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01.09.2012

Economic Trends

Some Improvement in the Labor Market

Timothy Dunne and Kyle Fee

The labor market closed out 2011 on a solid note, with employment gains in the month of December at 200,000 and the unemployment rate declining to 8.5 percent. Average weekly hours expanded by 0.1 percent and average hourly wages rose by 0.2 percent. The gains in employment were widespread across sectors, with the exception of government and temporary help services, which saw modest declines. After being flat for the first two months of the fourth quarter, the goods sector showed some life, with employment expanding in mining, manufacturing, and construction by 48,000.

According to jobs data from the household survey, the unemployment rate fell by 0.2 percent to 8.5 percent in December. The Bureau of Labor of Statistics made some changes to its seasonal adjustments, which smoothed out the sharp decline in the reported unemployment rate last month. Using the updated figures, the number of unemployed individuals fell by 226,000 in December and the number of employed individuals rose by 176,000. The labor force participation rate and the employment-to-population ratio remained unchanged, hovering near decadal lows.

Overall, the improvement in December rounded out a solid, though not spectacular, labor market performance for the last quarter of 2011. Employment gains averaged 137,000 in the fourth quarter, and the unemployment rate dipped 0.5 percentage points. For the year, the U.S. economy gained back 1.64 million jobs, or 137,000 jobs per month, and the unemployment rate declined 0.9 percentage points, averaging 9.0 percent over the year.

Still, compared to peak payroll employment prior to last recession, employment remains down by 4.4 percent (6.1 million jobs) and well off the typical recovery path. And while there has been talk of a recovery in the manufacturing and construction sectors, employment gains in these industries over the year have been modest. In total, the goods sector gained 362,000 jobs during 2011. To put this figure in perspective, it represents a net employment loss of 3.8 million jobs relative to the sector’s peak, or 17 percent of its pre-recession employment.

Payroll Employment Changes

Difference since
December 2012 (millions)
Difference since
December 2007 (millions)
Goods-producing
0.36
−3.81
Service-providing
1.56
−1.87
Public
−0.28
−0.41
Total
+1.64
6.10

Source: Bureau of Labor Statistics.

Compared to expectations at the start of the year, the unemployment rate came in well below forecasts. On the other hand, forecasters were a bit overoptimistic with regard to payroll employment growth. The average forecast at the end of 2010 for monthly payroll employment growth in 2011, according to Blue Chip Economic Indicators, a summary of 50 leading forecasters’ projections, was 161,000, somewhat above the current estimate of 137,000 (subject to revision). The forecast for the average unemployment rate in 2011 was 9.4 percent, when in fact it was 9.0 percent.

The fact that the unemployment rate declined more steeply than was forecasted, especially in the face of only modest payroll employment growth, likely reflects the fact that analysts expected the labor force to expand more briskly in 2011 than it did. In fact, the civilian labor force grew by only 275,000 individuals on year-over-year basis—a relatively meager addition. This weak labor force growth is reflected, in part, in the downward drift in the labor force participation rate that occurred in 2011. The implication is that because there was no significant expansion in the labor force, employment growth did not have to be very robust in order to bring the unemployment rate down. Thus, forecasters could both overpredict employment growth and, at the same time, underpredict the fall in the unemployment rate.