July 2, 2004
Employment growth disappoints, and unemployment stuck at 5.6%
The nation’s employment rolls grew by 112,000 in June, well below the pace of job growth in recent months, according to today’s employment report from the Bureau of Labor Statistics. The unemployment rate held steady at 5.6% after fluctuating between 5.6% and 5.7% since last December. Note that 5.6% is the same unemployment rate as in November 2001, the official end of the recession.
The relatively low growth rate in jobs took analysts by surprise, as employment was expected to grow in the neighborhood of 250,000. While most industries—with the exception of manufacturing—continued to add jobs, hiring was far more subdued in June than in the previous three months, when job growth averaged about 300,000 per month (revisions shaved 35,000 jobs off April and May’s growth).
Employment growth was much stronger in the household survey, which in earlier months had fallen behind the establishment survey, the widely preferred source for gauging employment growth. The labor force continued to grow more quickly, however, as formerly discouraged job seekers returned to the labor market. Over the past three months, the labor force has expanded by 629,000, compared to a decline of 228,000 over the prior three months. This trend means that more jobs must be created simply to keep the unemployment rate from going up.
In fact, there is some evidence that the ranks of the unemployed are increasingly dominated by those entering the workforce. The share of the jobless who are new entrants or re-entrants to the labor force was 38% last month, compared to 34% when the recovery began in November 2001.
Regarding the quality of the net new jobs, some higher-wage sectors came in particularly weak this month. Manufacturing employment, after expanding since February, contracted by 11,000 (the average wage in manufacturing is $16.12, compared to the overall average of $15.65). These losses mostly occurred in the lower-paying non-durable part of the industry (-14,000 jobs), but durable manufacturing only added 3,000 jobs after averaging 21,000 per month over the past three months. Hiring in information services—which has an average hourly wage of $21.34—remains weak, and the sector added only 1,000 jobs in June. Financial services (with an average hourly wage of $17.58) also added fewer jobs than in recent months.
On the other hand, professional and educational/health services were large contributors to June’s payroll gains, adding 39,000 and 37,000, respectively. While prior monthly gains in professional services were largely in temporary work, a sub-sector with below-average wages, last month’s jobs were added in higher-end sub-sectors, including computer systems design and management.
Netting out these various industry shifts reveals that over the past year (between the second quarter of 2003 and the second quarter of 2004) industries growing faster than average pay wages that are 16% lower than those of slower-growing industries.
While these net job changes affect wage growth at the margin, a larger factor dampening wage growth is the continued slack in the job market, which persists despite the fact that the jobless recovery is now behind us. Last month, hourly wages rose only slightly, by 0.1%, and are 2% above their level of one year ago, before adjusting for inflation. Annual inflation was about 3% in May (June inflation figures are not yet available), so unless price growth slowed significantly in June, real hourly earnings will be down in real terms over the past year, and will have fallen in six of the past seven months.
Another sign of weak demand by employers in June was the two-tenths-of-an-hour decline in weekly hours worked. The very slight increase in hourly wages and this drop in weekly hours caused weekly earnings to fall in nominal terms, from $528 in May to $526 in June. The relatively low number of jobs added this month in tandem with the decline in weekly hours led the index of aggregate hours, a broad measure of labor market demand, to fall for the first time since last July.
While the recovery that began last fall remains in place, June’s report reveals far slower job growth than expected and provides evidence of continued weakness in the labor market. The unemployment rate is stuck at 5.6%, as more workers flood the job market and compete for the new jobs. This dynamic, along with the diminished quality of the net new jobs and the recent increase in consumer inflation, is generating a new problem: stagnant real hourly wage growth for most workers.
Employment is growing again, and the economy continues on a path of solid expansion. Yet there is nothing in today’s report that would lend support to the view of the Federal Reserve Board and many in the business community that the economy is overheating and needs the restraint of higher interest rates. The growth in the average hourly wage has fallen behind the rate of inflation in recent months, and this trend will likely continue in June as well. Thus, any growth in family incomes is coming from more family members working, not from higher wages (or from non-labor sources). In this regard, the benefits of the economic recovery are likely still eluding many working families.
By EPI senior economist Jared Bernstein
with research assistance by Yulia Fungard.
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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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