April 1, 2005
Payroll growth disappoints; lower unemployment belies continued weakness in labor market
The nation’s employers added 110,000 jobs last month, according to today’s report from the Bureau of Labor Statistics (BLS), which was about half the amount expected by forecasters. March’s payroll gains were the lowest since July of last year, and were sharply lower than the February 2005 gain of 243,000. The recession started exactly four years ago last month, yet private-sector payrolls remain 389,000 below their pre-recession level, an historically unprecedented example of weak employment growth.
After a strong surge in the spring of 2004, payroll growth has been quite subdued, especially compared to prior recoveries. Only two of the last 10 months have seen job growth of more than 200,000. Averaging over the past six months, the economy has added 174,000 jobs per month; the analogous average for the early 1990s recovery at this stage is 338,000 jobs per month, reflecting the historical norm for contemporary recoveries.
The household survey (from which the BLS derives the unemployment rate) posted a large jobs gain last month of 357,000, pushing the unemployment measurement down to 5.2%, the same rate as in January 2005 and the lowest since September 2001. But monthly employment numbers from this survey are notoriously volatile. In February, for example, the household survey showed a loss of 97,000 jobs. Neither month’s results are very plausible. Averaging out some of the monthly volatility, job growth over the past six months from the household survey has been 162,000, not too different from the growth reported in the payroll survey (174,000).
Turning to industry-level analysis, manufacturing (-8,000) and retail trade (-10,000) were the only major sectors to shed jobs, but job gains were lackluster in most other sectors. The largest losses within the manufacturing sector occurred in vehicle production and apparel. Another sign of weak manufacturing demand in March was the decline in the length of the average workweek, dropping by one-tenth of an hour overall and two-tenths of an hour for overtime.
Significant job gainers included construction and health services, two sectors that have consistently added to employment in the recovery. Wholesalers added 15,000 jobs, the best month for this sector since last April, primarily reflecting selling activity in manufactured goods. Clearly, consumers continue to demand manufactured goods, but, as shown by the growing trade deficit and loss of manufacturing jobs, their demands are being met by imports as opposed to domestic production.
Despite the fall in unemployment in the household survey, the share of the unemployed who are long-term jobseekers–that is, those who have been looking for at least six months–ticked up from 20.5% to 21.5%, as did the average length of joblessness, which increased from 19.1 to 19.5 weeks. This large of a gap between a low unemployment rate and long jobless spells is historically anomalous. Historically, unemployment rates between 5.0 and 5.5% have been associated with long-term joblessness rates of 11.9% and average jobless spells of 12.9 weeks, far below the current levels. Clearly, the labor market is not nearly as tight as the 5.2% unemployment rate suggests.
Another trend corroborating the slack in the labor market is the ongoing weakness in wage growth, relative to both inflation and productivity growth. Compared to the same month last year, the hourly wages of blue-collar workers in manufacturing and non-managers in services grew 2.6%, a rate that fails to keep pace with the last monthly reading of inflation (3%, February 2004-February 2005). With today’s BLS report, we can observe first quarter wages for 2005. Compared to the last quarter of 2004, hourly wages are up at an annual rate of 2.3% and weekly earnings are up 2.0%.
The fact that the growth rate of nominal wages has slowed has two important implications. First, it provides evidence of ongoing slackness in the job market, despite the low unemployment rate. Second, it implies that real wage losses are not solely a function of faster inflation due to higher energy costs. As we show in today’s JobWatch, 76% of the swing from rising to falling real earnings over the past few years is due to slower wage growth; only 24% is due to faster inflation.
March’s disappointing job growth has important implications for the strength of the recovery. Yesterday’s reports of the growth in personal income and consumption in February pointed to strong job growth that month as a key factor underlying income gains. Since real wages are lagging inflation for many in the workforce, the economy is dependent on robust employment growth to generate the income needed to sustain the recovery. In this regard, the weak payroll gains in March may constrain working families’ ability to keep spending at the pace needed to promote faster growth.
By EPI senior economist Jared Bernstein, with research assistance by Yulia Fungard.
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