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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Economic Trends

Labor Markets: Glass Half Empty…Glass Half Empty

By Timothy Dunne and Kyle Fee

The April 2012 employment report offered a mixed bag of results. Payroll employment growth was modest, with the economy adding 115,000 jobs in April. The private service sector provided the bulk of the gains in April (+116,000), while the government sector continued to shed employment (−15,000). Since late 2008, state and local government employment has declined by 650,000 or 3.3 percent. The goods sector was mixed, with construction employment essentially holding steady (−2,000) and manufacturing increasing employment by 16,000. Inside the manufacturing sector, gains were led by the fabricated metals, machinery, and transportation industries, which have accounted for most of the rise in manufacturing employment over the last year. On the positive side, February and March were revised up slightly, a total of 53,000 jobs.

Average weekly hours in private industry held steady at 34.5 hours a week, as did average hourly earnings (+one cent). Year-over-year, average hourly earnings in the private sector have risen by a scant 1.8 percent—unadjusted for inflation. Weekly earnings showed a similar increase. On balance, like March’s report, April’s payroll employment gains were seen as rather tepid—losing some of the momentum observed at the end of 2011 and early 2012.

The household survey reflected a mixed picture, as well. The unemployment rate continued to slowly decline, coming in at 8.1 percent for April. On a year-over-year basis, the unemployment rate has come down 0.9 percentage points. However, looking below the headline number, the results were pretty weak. The number of unemployed persons did fall by 173,000, but the reported number employed also fell by a similar amount (169,000), and the labor force contracted. Both the employment-population ratio and the labor force participation rate shrank in April and now stand at 58.4 percent and 63.6 percent, respectively. These measures of labor utilization are at or near decadal lows.

Over the course of the last four years, the size of the labor force has essentially remained constant, even as the civilian noninstitutional population (16 years and older) has grown by over 9 million individuals. That means that any potential rise in the labor force due to population growth has been completely offset by the decline in the labor force participation rate. Some of the decline in labor force participation has been expected, as the baby-boomer generation moves into the retirement. However, the recent magnitude of the decline is surprising and reflects in part the weak state of the current labor market.

We can see this by looking at the labor force participation rate for prime-age workers, 25 to 54 years old. The labor force participation rate for prime-age workers should be less sensitive to schooling and retirement decisions, which often affect the labor force participation rates of younger and older cohorts. Even for males aged 25-54, we saw steady declines in participation rates not only during the recession, but also during the recovery. A recent Chicago Fed Letter by Daniel Aaronson, Jonathan Davis, Luojia Hu reports that only one-quarter of the decline in labor force participation rates in the period from 2008 to 2011 can be explained by demographic factors.

We can get a sense of how unexpected the recent path of the labor force participation rate was by comparing it to recent projections by the Bureau of Labor Statistics (BLS) and the Congressional Budget Office (CBO). In January of 2012, the BLS projected that the labor force participation rate would decline from 64.7 percent in 2010 to 62.5 percent in 2020—a decrease of 2.2 percentage points over 10 years. Less than two years into the projection, labor force participation has already fallen by half of the projected amount—1.1 percentage points. The CBO provides annual projections from 2011 through 2021. For 2012, the CBO projected the labor force participation rate would be 64.6—a full percentage point above the current rate. Moreover, the CBO did not expect the labor participation rate to reach its current level of 63.6 percent until 2017, and the CBO’s projections do incorporate business cycle conditions.

Each of these projections shows that the current labor force participation rate is well below the trend rate predicted from these official agency models, and it is likely the case that cyclical factors continue to play an important role in explaining the gap. In fact, a recent Kansas City Fed Economic Review article by Willem Van Zandweghe estimates that cyclical factors explain about a half of the decline in the labor force participation rate between 2007 and 2011. This suggests that if the economy improved, individuals that are not in the labor force (not counted in the unemployed) would re-enter the workforce—putting some upward pressure on unemployment rates, but also expanding the labor force.

And there is evidence that the number of individuals not in the labor force but available for work has increased. The Bureau of Labor of Statistics estimates that the number of individuals who are not in the labor force but want a job is roughly 6.3 million or 7.2 percent of the total number of people not in the labor force. This is up by roughly 1.5 million from before the recession. Still, the pace of economic growth will need to accelerate from the first quarter’s rate of 2.2 percent in order to generate the rise in labor demand needed to induce more individuals to re-enter the workforce.