Econ 101: Jobs—Where Are They?
Subscribe today for Free Enterprise Updates
- Latest business trends and best practices
- News about legislation and regulation impacting business
- Business how-to articles from industry experts
- Commentary and interviews with newsmakers in business and politics
The jobs report for the month of August was uniformly bad. Total job creation was only 96,000. Data for the last two months were revised down a combined 41,000 jobs. The workweek was unchanged at a historically low 34.4 hours, and average hourly earnings were down 1 cent. The unemployment rate dropped two tenths of a percentage point to 8.1%, but only because 368,000 people left the workforce, and the participation rate fell to 63.5%—a 31-year low.
Surprisingly, the stock market, on a stampede from the announcement of a European Central Bank bond purchase program announced the day before, blew through this bad news and ended the day on an up note. So what are we missing? Is the labor market in better shape than these numbers suggest, or is the market ignoring reality in its euphoria over yet another European bailout? Perhaps a closer look at the labor market with a longer term perspective is in order.
Let’s start with the top line employment number from the establishment survey. The data showed that the economy added 96,000 net new jobs in August, down from 141,000 in July. The monthly average job creation since the end of the recession in mid-2009 has been only 74,000. And while the economy has created almost 2.8 million net new jobs over that period, it is still 4.6 million below its prerecession peak.
While the establishment survey provides the jobs numbers that so often get quoted, it is the employment numbers from the household survey that are used to calculate the unemployment rate. In August, the household survey showed a loss of 119,000 but a cumulative gain in employment of 2.1 million since the end of the recession. That amounts to an average gain of only 55,000 per month, small indeed when you remember that over 80,000 new workers enter the labor force each month. Hence, the economy needs at least 80,000 new jobs each month just to stay even.
The Unemployment Rate
With such a poor performance in creating jobs, how is it that the unemployment rate has dropped from a peak over 10% to its current level of 8.1%. The unemployment rate is the ratio of the total number of unemployed divided by the total civilian workforce. The total civilian workforce is the number of people employed plus the number of people unemployed and actively looking for work. When working age individuals stop actively looking for work, they are no longer counted as unemployed or as part of the workforce, and the reported unemployment rate drops. Currently, there are over 2½ million workers who have dropped out of the workforce and are classified as “marginally attached.” This number is over 1 million people higher than what we saw in more normal times prior to the recession.
In August, 368,000 people stopped looking for work and exited the workforce. The result was a drop in the unemployment rate from 8.3% to 8.1% despite the fact that the household survey reported a drop in employment of 119,000 people. Without this mass exodus, the unemployment rate would have remained at 8.3%. Touting such a drop in the unemployment rate is like crowing about not having a flat tire when you have just run out of gas!
Another way of looking at this issue is the so-called participation rate—the number of people in the labor force divided by the total working age (16 years of age and over) population. It is a measure of the percentage of the working age population that is contributing or trying to contribute to the productive capacity of the economy. Higher participation rates are generally seen as a positive for the economy. The current participation rate is 63.5%, down from 65.7% at the end of the recession, and is at the lowest level in 31 years.
In addition to the marginally attached workers not being counted in the unemployment rate, and the plummeting participation rate, there are over 8 million workers who are working part time (and therefore counted as employed) but who would prefer a full-time job. This number is over 3½ million higher than its prerecession level. Such high levels of underemployment are indicative of a weak economy. The government provides an alternative to the unemployment rate called the U-6, which attempts to measure unemployment and underemployment. This measure stands at 14.7%, which is very high by historical standards.
Another indicator of the health of the labor market measures how long people that lose their jobs remain unemployed. Today, the median duration of unemployment is about 18 weeks. That is, 50% of the unemployed stay unemployed for longer than 18 weeks, while 50% are reemployed before that time period. However, median duration measures can hide extremes in the data. The average duration of unemployment is currently over 39 weeks. About 5 million of the total 12.6 million unemployed have been so for over 27 weeks.
Poverty and Inequality
At these levels, it’s no surprise that the less fortunate continue to suffer. The recession and the current labor market weakness triggered a 2.5 percentage point increase in the poverty level since the start of the recession, driving the poverty level to 15.0% in 2011, the latest data available. The poverty level responds very quickly to cyclical fluctuations in the economy and typically rises rapidly as the economy deteriorates. Given the slow nature of this recovery and the sheer numbers of long-term unemployed, the poverty rate is expected to remain elevated and to only gradually return to its long-run trend.
This recession has frequently been portrayed as a struggle between the haves and the have-nots. Yet we must be careful to separate short-term fluctuations in the business cycle from longer term trends in the economy. Over the past 30 years, our economy, as measured by the Gini coefficient, has become more unequal. The Gini coefficient has increased from 0.403 in 1980 to 0.477 in 2011, the most recent data available. A number closer to 0 indicates a greater level of equality, and a number closer to 1 implies greater inequality.
There have been several hypotheses to explain these trends, including the growing importance of the services sector, the rise of information technology, the greater reliance on capital equipment and the commensurate demand for technical skills, and greater returns to higher education. What is clear, however, is that regardless of which political party has held power, the rate has continued to climb. The Gini coefficient climbed more during the Clinton administration than under George W. Bush and has risen for each of the past three years.
So what do we need to get the labor market back on track? The answer is as easy to state as it is hard to achieve—economic growth. Over the last three years, the economy has been able to achieve a real growth rate of only 2.2%. This pace is slightly below what economists estimate to be our long-run potential rate of growth. According to recent reestimates of Okun’s law, which relates GDP growth to employment growth, we need to get real growth up to about 4½% for about three years to drive the unemployment rate down to about 5%. How do we achieve such a lofty growth rate? Pro-growth tax reform, more investment in needed infrastructure, wiser use of our known energy reserves, and a less onerous regulatory structure may be good places to start.