September 3, 2004
Payrolls up, but growth remains moderate
Payrolls expanded by 144,000 last month, and the unemployment rate ticked down slightly to 5.4%, according to today’s report from the Bureau of Labor Statistics. The initial report of very slow payroll growth in July—32,000— was revised up significantly to 73,000. However, even with these upward revisions, it remains the case that employment growth has slowed in recent months. Between March and May of this year, payroll grew by an average of 295,000 jobs per month; since then, the average has fallen to 104,000.
At 5.4%, the unemployment rate is the lowest it has been since October 2001, a month before the recovery began. The jobless rate peaked at 6.3% in June 2003, and after falling over the remainder of that year, it has hovered around five-and-a-half percent in 2004.
Notably, much of the recent progress against unemployment, including last month’s, has been due the slow growth—or in August’s case, the decline—of the labor force, itself a reflection of the recent slowing in job growth. In fact, the share of the adult population in the labor force fell slightly last month from 66.2% to 66.0%, and remains 1.1 percentage points below its level at the end of the last expansion in March 2001.
The labor force contracted by 152,000 in August, and there was also a significant jump of 214,000 in the number of those not in the labor force who say they currently want a job. The average annual growth rate of the labor force this year has been 0.5%, about half that of last year (1.1%).
An even larger deceleration occurred among so-called prime-age workers , those adults age 25-54 who are most likely to be in the job market, dropping from 1.6% last year to 0.5% this year. Since March 2001, their participation rate in the labor force is down 1.3 percentage points, a highly unusual occurrence this far along in a business cycle. In fact, averaging over all past recessions/recoveries, the participation rate of prime-age workers has been up 1.2 percentage points, almost the same amount it has fallen in the current case.
Given these dynamics, a central question is whether employment is now growing fast enough to absorb the considerable slack left over in the labor market from the recession and jobless recovery. For this to occur, payrolls need to grow fast enough to accomplish two goals. First, simply to keep the unemployment rate from rising, the economy needs to provide enough job openings for those entering and re-entering the job market. Obviously, this is not a challenge in months like August, when the labor force contracts. In fact, employment growth in the Household Survey, from which unemployment data are derived, was up only 21,000 last month; unemployment, however, still fell due to the labor force decline. Second, the economy needs to provide enough jobs so that those who were laid off or left a previous job can be rehired.
The estimates of monthly growth needed range from about 125,000 to 150,000 to meet the first goal, and significantly more than that to reach the second. Thus, given the fact that payrolls have been expanding at around 100,000 per month over the past few months, it is not surprising that the unemployment rate has been largely unchanged. The labor market needs at least twice that average to make significant progress against remaining labor slack, especially once the labor force begins to grow apace again.
Employment in both manufacturing and services expanded last month, though many key sub-industries continue to struggle. The 36,000 job gain in durable manufacturing was the best month since before the recession, but the BLS reported that “this increase mostly reflected auto workers returning to work from the larger-than-usual annual retooling shutdowns in July.” The largest service-sector gains came in health care and social services, a sector that has never succumbed to the job losses seen elsewhere over the past few years.
Industries that did poorly in August included retail trade, down 11,000 last month and 25,000 over the past two months, reflecting diminished consumer confidence and weak income growth. Information services also remains weak, down 10,000 last month and over 550,000 since its peak in March 2001, the start of the last recession. Leisure and hospitality, including entertainment, recreation, accommodations, and restaurants, added only 6,000 jobs last month and has averaged only 5,000 per month over the past three months compared to a monthly average of 34,000 over the previous three months.
Unlike health care, these weaker sectors reflect more discretionary types of expenditures by consumers. In this sense, they are indicative of the underlying weakness in the current job market, where consumers constrained by moderating wage growth and rising prices are interacting with employers who remain quite resistant to expanding their workforces given persistent uncertainty about the strength of the recovery.
The problem of long-term unemployment remains severe. The average duration of jobless spells rose from 18.6 weeks in July to 19 weeks in August, and the share of jobseekers who have been looking for work for over half a year increased from 20.4% to 20.7%. August marks the 23rd month that more than one-fifth of the unemployed have suffered such long-term joblessness. Previously, the longest such spell was 18 months, from December 1982 to May 1984. Note that the unemployment rate averaged 9.2% over that period, compared to 5.8% over the past 23 months, thus providing another example of how the current unemployment rate paints an overly rosy picture of the extent of labor market slack.
The growth in hourly and weekly wages picked up a bit last month. The 2.3% annual growth rate of hourly wages is still, however, below the recent pace of inflation, up 3.0% from July 2003 to July 2004. Weekly earnings are up 2.9%, just about even with inflation. Thus, working families have to add hours to their work week in order to raise incomes right now, and unless employment growth picks up, this will remain a challenge for many families.
While the recent payroll numbers, including the revisions, confirm the view that the jobless recovery is safely behind us, it is equally clear that job growth has decelerated over the past three months. Payrolls may now be expanding fast enough to prevent unemployment from climbing higher, but, unless the labor force continues to contract—an unlikely scenario—we are not adding enough jobs to significantly lower unemployment in the coming months.
By EPI senior economist Jared Bernstein
with research assistance by Yulia Fungard.
For more information on the most recent job and wage data, go to EPI’s web feature JobWatch.org.
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The Economic Policy Institute JOBS PICTURE is published each month upon release of the Bureau of Labor Statistics’ employment report.
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