Taking Stock of the Labor Market Recovery
A number of factors are putting the pace of labor market improvements on center stage for many financial market observers. At its September 2012 meeting the Federal Open Market Committee (FOMC) decided to provide further policy accommodation using large-scale asset purchases, and citing anemic growth in the economy and no substantial reduction in the unemployment rate, declared that it would continue to buy agency mortgage-backed securities until the outlook for the labor market had improved substantially. At the time of that meeting, the unemployment rate stood at 8.1 percent, having been above 8 percent for an exceptionally long period—43 consecutive months. Moreover, in December 2012 the FOMC announced that the low level for the federal funds rate would be appropriate at least as long as the unemployment rate remains above 6-1/2 percent.
Whether improvement is viewed as substantial is inherently a judgment call that the FOMC will make. In this article, we provide a broad summary of the changes in the major labor market measures for the US economy over the last year. (Note that due to the lapse in federal funding, the BLS did not release the employment report for September on October 4, as originally scheduled.)
Employment as reported by business establishments (payroll survey) expanded on average by 184,000 workers every month in the last year. The most recent data we have (for the month of August) suggests slightly lower growth, at 169,000. Monthly payroll changes are always volatile, but even the smoother 6-month moving averages have stayed above 160,000 this year so far. Employment growth has been very broad based across different industries. All major sectors, with the exception of government, increased payrolls on average each month. Professional and business services added 51,000 jobs per month, leading the pack, followed by trade, transportation, and utilities (43,000), leisure and hospitality (35,000) and education and health (31,000). Even though the strong performance in manufacturing and construction in the early part of 2013 declined somewhat, these sectors have added 2,000 and 14,000 jobs, respectively, per month over the past 12 months on average. One point to note, however, is that the 3-month average suggests the pace of the increase has lost some momentum over the last several months, with the last three months registering fewer than 150,000 new jobs every month on average.
Employment as reported by households (household survey) has increased by more than 160,000 jobs a month on average since August 2012. Monthly changes in the household survey can be much more variable than the payroll survey, as it comes from a smaller sample.
This variability can make it hard to interpret the data. For instance, in the most recent household data we have (August 2013), the labor force shrank by a sizeable 312,000 workers, employment fell by 115,000, and unemployment declined by 198,000. As a result, the 0.1 percentage point decline in the unemployment rate in the month of August could be perceived as being due to a decline in the size of the labor force. However, over the past 12 months, the general picture remains relatively healthy, with the increase in employment (+167,000) accompanied by a decline in the stock of the unemployed (−97,000) and a modest rise in the size of the labor force (+70,000). This combination of changes has resulted in a sizable decline in the unemployment rate over the past 12 months of 0.8 percentage points.
Elsewhere in labor market data, one can find other encouraging signs, such as very stable levels of average workweek hours for production workers as well as other private employees. Current levels are essentially the same as before the recession, suggesting very little potential for improvement on this measure going forward. Employers’ demand for more labor most likely will be met with new hiring rather than more hours per worker. Nevertheless, we observe that manufacturing overtime hours have increased by a bit since a year ago, from 4.1 hours to 4.4 hours per week. As a result, data on the labor demand of employers in the near term, such as job openings from JOLTS or the help-wanted online advertising index by the Conference Board, all point to a relatively firm demand for hiring by employers going forward.
Not all labor market indicators are as encouraging. For instance, the monthly average increase of 70,000 workers in the labor force is far below the level needed to keep the labor force participation rate stable with a growing population. As a result, labor force participation has continued to decline gradually over the past year, falling from 63.5 percent to 63.2 percent, one of its lowest points since the late 1970s. As the population active in the labor market shrinks—relative to the total population—observed increases in the employment pool of 167,000 per month do not increase the fraction of the population that is employed. The employment-to-population ratio has been virtually stuck around 58.5 since the beginning of the recovery in mid-2009.
Another reason to be cautious about overstating the extent of improvement in the labor market is the composition of the employed and the unemployed. Two observations stand out. First, a significant fraction of the unemployed consists of the long-term unemployed, workers who have been unemployed for more than six months. These workers will suffer more from the long-term consequences of the recession. Second, a substantial portion of the employed consists of workers who are employed part-time due to economic reasons. The breadth of part-time employment underscores the presence of labor market slack even among the employed.
The fraction of unemployed workers who have been unemployed for more than six months skyrocketed during the course of the recession, almost tripling to 45 percent at one point. This fraction has nudged down a bit but still stands at 37.9 percent as of August 2013. Early in the recovery, one concern was that these unemployed workers are provided with incentives to stay unemployed due to the generous unemployment compensation enacted as part of the Emergency Unemployment Compensation (EUC) legislation and extensions. Early in 2010, there were 5.8 million unemployed workers receiving EUC and extended benefits combined, when the number of long-term unemployed workers was hovering around 6.5 million. As of August 2013, the size of the long-term unemployed pool has shrunk to 4.2 million, along with a much sharper decline in the number of beneficiaries of EUC and extended benefits, to a mere 1.5 million. It is hard to discern whether those unemployed exited the pool because they found jobs or because they just gave up and dropped out of the labor force. However, the sheer size of the smaller pool of beneficiaries suggests that EUC cannot be a major factor in explaining the persistence of long-term unemployment.
Part-time employment due to economic reasons surged during the recession. The sum of the two categories in the BLS report that are used to calculate the number of those employed part-time due to economic reasons—part-time due to slack work and part-time due to lack of full-time job availability—was nearly equal to 6 percent of all employment in the United States at one point. This has declined somewhat but still stands at 4.8 percent as of August 2013.
Part-time employment could serve as a way to adjust the labor force in the wake of a large downturn, and in fact it seems like this is what happened during the last episode. Even though employment was shrinking by large numbers, the pool of part-time workers was increasing to unprecedented levels. For instance, in the first six months of 2009, part-time employment increased by 205,000 per month on average. Meanwhile, total employment was shrinking by 450,000 workers per month over the same period, led by a 650,000 per month decline in full-time employment. It is likely that much of this situation is explained by employers reducing the work hours of their full-time workers.
Since September 2012, we have received a lot of information about the labor market that is encouraging and suggestive of overall improvement. There are, however, still soft spots indicating continued weaknesses. When the FOMC emphasized the importance of labor market improvements last year, Committee members were looking at a very weak labor market outlook. Most members expected the unemployment rate to drop below 8 percent by the end of 2013 and to settle between 6 percent and 6.8 percent by the end of 2015 (as reported in the Summary of Economic Projections). Since then, the unemployment rate has declined to 7.3 percent. The most recent projections, from September 2013, show that most Committee participants now expect the unemployment rate to be somewhere between 7.1 percent and 7.3 percent by the end of this year and somewhere between 5.4 percent and 5.9 percent by the end of the projection period, 2016.