Jobs Picture, April 6, 2007

April 6, 2007

Improving job market bucks slowing trend in rest of economy

By Jared Bernstein with research assistance from James Lin

The nation's payrolls grew by 180,000 last month, according to today's report by the Bureau of Labor Statistics, the biggest monthly gains so far this year. Unemployment dipped to 4.4%, tying last October for the lowest rate since May 2001. The solid jobs report beat analysts' expectations, and, with upward revisions to January and February, average payroll growth over the past three months was 150,000, a healthy rate that should handily provide job opportunities for the growing labor force.

Recent reports on other aspects of the economy—from overall GDP growth (below trend at 2.4%, 2006q2-2006q4), to productivity, capital investment, and especially housing—have been far less impressive than today's jobs report, suggesting the labor market is bucking the slowing trend in the rest of the economy.

One likely explanation is a first principle of labor economics: labor demand is derived demand, i.e., as long as employers, suppliers, health providers, etc. continue to see buyers, the job market will expand. In this regard, the seemingly tireless American consumer continues to play a key role in the expansion. Real consumption was up 4.2% in the last quarter of last year, and 3.2% over the last three quarters.

While the low unemployment rate signals a tight labor market, wage growth has not accelerated. In fact, the 4% year-over-year growth rate of hourly wages is slightly below recent months, and the lowest since October of last year. On a quarterly basis, hourly wages were up 4.1% since the first quarter of last year, and have been between 3.9% and 4.1% since 2006q2. Weekly earnings grew more quickly, up 4.4% over the year, due to the growth of weekly hours worked. But there is little in today's report that should raise the threat of inflationary pressure from the job market. To the contrary, at this point in the six-year-old business cycle, robust job growth is a key source of income driving the economy forward.

Surprisingly, construction was a big contributor to March's job gains, adding 56,000. But this is largely a "bounce-back" from February's weather-driven 61,000 job loss. Home building continues to contract, though only slightly in March, down 1,200, but it is off 16,000 for` the year. The housing-related jobs index, which includes residential contracting and real estate (among others), is down 68,000 since its peak in April of last year.

Two important sectors were weak last month: manufacturing and business services. Factory employment continues to erode, falling 16,000 last month, the ninth consecutive month of job losses. Over the full business cycle, manufacturing is down 2.8 million jobs, or 17%. Though this is a long-term trend for an industry that has suffered from persistent trade deficits in manufactured goods, at this same stage in the last business cycle, manufacturing employment was down 3% in comparison. Clearly, the hemorrhaging of jobs in this critical sector has hugely accelerated, a fact that policy makers have largely ignored.

The decline in business service employment (down 7,000) was largely driven by a large decline of 12,300 in employment services, including temp work. This may not be a bad sign as it suggests employers are turning more to permanent hires.

The slight tick down in unemployment, along with a slight increase in the share of workers employed, suggests a tightening job market. However, unemployment for one group, African American men, rose 0.9 percentage points to 9.8%, more than twice the overall rate. This is a very noisy series, month-to-month, but other indicators suggest that these men are having difficulty in the current job market. Over the past year, their employment rate, a proxy for demand for these workers, is down 0.8 points, while the labor market average is up slightly. And over the course of the cycle, their employment rate is down a large 2.5 points, suggesting that the rising tide has not given African American men enough of a lift.

One other negative indicator from an otherwise positive report is the persistently high levels of long-term unemployment. Though this indicator has improved a bit since its highs through the jobless recovery, both the median and average duration of time spent jobless, and the share jobless for at least half-a-year rose last month, the latter up to 18.4%, the highest since last May. This is also consistent with elevated levels of "continuing claims on the unemployment insurance rolls. One reason for the "stickiness" of these indicators—their lack of response to the improving job market—is that more older workers comprise the ranks of the jobless, and they typically engage in longer job searches.

As noted, with today's jobs report, we now have six years of employment data from the last business cycle peak of March 2001. The figure below compares job growth over the current cycle to four other cycles that have lasted at least this long. The figure reveals that despite the recent healthy pace of job growth, this business cycle still significantly lags the others. Six years out, payroll employment is up 4%, compared to an average of 13% for the other cycles in the figure, and 9% for the 1990s cycle, which also begin its life as jobless.

Employment growth at six: cycles that have lasted at least six years

Had job growth in this cycle occurred at the rate of the last cycle (9% vs. 4%) the nation's payrolls would have added 12 million jobs over the cycle as opposed to 5 million. In fact, the 5.1 million jobs added over this cycle is lower even in raw numbers than the 8.6 million jobs added over the 1960s recovery, a time when the payroll base was less than half of today's level. In other words, the jobless recovery, while safely far behind us, has done lasting damage to the magnitude of job growth over the full cycle.

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