July 8, 2005

Solid job growth in June, but still below expectations

The nation’s payrolls grew by 146,000 jobs in June, and the jobless rate dropped to 5.0%, its lowest rate since September 2001, according to today’s report from the Bureau of Labor Statistics (BLS).  With upward revisions to April and May adding another 44,000 jobs in those months, employment is up by 1.1 million over the first half of this year.

Though June’s growth was solid, it is the second month in a row that job gains came in below expectations.  Forecasters were predicting 200,000 jobs, about 50,000 above the reported gains.  On average, payrolls grew 125,000 per month over the past two months, well below the average monthly gain of 210,000 through April this year.  Whether this downshift represents a new, more moderate trend in job growth is yet to be seen.

A particularly positive indicator in today’s report is the 2.3 percentage-point drop in the share of the long-term unemployed (persons seeking jobs for at least six months), the largest monthly decline in over a decade.  Representing 17.8% of the unemployed, this is the lowest level for this indicator since April 2002.  Long-term unemployment has fallen three months in a row, suggesting these job seekers are finally having an easier time finding work. 

Still, it is unusual for long-term unemployment to be this high with unemployment so low.  Historically, 5.0% unemployment rates have been accompanied by an average long-term jobless rate of 10.7%, well below June’s level of 17.8%.

As shown in today’s BLS report, the job market has a number of ongoing strengths and weaknesses.  On the positive side, monthly job growth is persistent-the labor market is at a stage in the recovery when it can count on employers to continue creating jobs.  Excepting a few key industries, such as manufacturing, most sectors are adding jobs on a monthly basis—an important signal of widespread labor demand.

However, as discussed in greater detail below, the rate of job growth is far below that of past recoveries.  While most industries are adding jobs, they are adding fewer than expected based on past experience.  Why then is the unemployment rate so low?  First, unemployment remains well above the 4.0% level achieved in 2000, so while 5.0% is a historically low rate, it is not representative of a “full-employment” job market. 

Second, the share of the population in the labor force is still depressed relative to its pre-recession level.  In June, this rate ticked down one-tenth of a point to 66.0%, the same level as one year ago, and down 1.2 points from its level at the start of the recession (March 2001).  Note that this rate is down even more than average for adults age 25-54 (-1.5 points) and college graduates (-1.8 points), two groups for whom we would expect rising participation rates at this stage of recovery.  The lack of labor force participation among people we would expect to be working suggests that slack remains in the job market, and that measured unemployment, at 5%, is probably painting too rosy a picture of job market tautness.

The industries that added the most jobs last month included professional services, health care, and sectors related to the long boom in housing, including construction, real estate and mortgage services.  A continued positive indicator of job quality is that the recent growth in professional services is largely coming from sub-sectors outside of temporary work, suggesting more permanent hires in this key sector.
 
Manufacturing, however, appears to have sunk back into a negative trend, with job losses in all but two months since June of last year.  Factory employment is down 2.7 million since the recession, and 1.6 million of these losses accrued since the recovery started in November 2001.  As a share of total employment, manufacturing is now only 10.7%, down 2.1 percentage points just since the recession began.

With today’s data, we have the first look at some important indicators for the second quarter of 2005.  Aggregate hours, a proxy measure of economy-wide demand, grew at annual rate of 2.8% last quarter, its fastest growth rate since the fourth quarter of 1999.  By boosting the growth of labor income, this growth in total hours worked helps to sustain the recovery.  However, hourly wages of blue-collar workers and non-managers grew at an annual rate of 2.8% last quarter, just about the rate of recent inflation readings.  Thus, the real growth in working-class family incomes is being driven by additional hours worked, not by higher real wages.

Economists generally consider job growth in the neighborhood of 150,000 to be adequate—not too hot, not too cold, and about the level needed to keep unemployment from rising (given a growing labor force).  However, prior recoveries have had sustained periods when job growth is well above adequate, and such periods are necessary to make up for job losses over the recession. 

For example, over the past year, job growth has averaged 172,000.  In the prior recovery of the 1990s, which also had a jobless phase, the comparable monthly average was 310,000.  Gains of this magnitude over the 1990s recovery helped to create a set of labor market conditions that were all-too-unique over the past three decades: a job market tight enough to ensure that the gains of productivity growth were broadly shared with workers of all income classes.  Given the rate at which the labor market has been adding jobs in this recovery, these conditions have not yet occurred, and that helps explain the large and growing gap between productivity growth and the wages of many in the workforce.

Today’s report was written by EPI economist Jared Bernstein, with research assistance from Yulia Fungard.

For more information on the most recent job and wage data, go to EPI’s Web feature JobWatch.org.

To view archived editions of JOBS PICTURE, click here.

The Economic Policy Institute JOBS PICTURE is published each month upon release of the Bureau of Labor Statistics’ employment report.

EPI offers same-day analysis of income, price, employment, and other economic data released by U.S. government agencies. For more information, contact EPI at 202-775-8810.