February 3, 2006
Unemployment falls and wages rise as job market shows clear improvement
The nation’s unemployment rate fell to 4.7% in January—the lowest rate since July 2001— and payrolls expanded by 193,000 jobs, according to today’s report from the Bureau of Labor Statistics (BLS). Hourly wage growth also accelerated, up 3.3% over the past year, the highest growth rate since February 2003. Also, the share of the jobless population stuck in long-term unemployment fell to 16.3%, the lowest rate since March of 2002, suggesting an increase in the availability of jobs.
The one negative indicator was the lack of growth in average hours worked per week, which has been stuck between 33.6 and 33.8 since October 2002. Typically, this indicator is more responsive to strengthening labor demand than has been the case over this recovery.
The 2006 labor market got off to a solid start. Revisions added 81,000 more jobs than initially reported in November and December of last year, and the 193,000 gain in January was about equal to the average pace of growth in 2005 of 189,000 (this average ignores the impact of the Gulf Coast hurricanes). All told, employment is up 2.1 million, or 1.6% over the past year.
This pace of job growth, though solid, still remains well-below that of past recoveries. Over the comparable period in the recovery of the 1990s, payrolls grew at a rate of 2.8%. If we were adding jobs at this rate today, the average monthly gain over the past year would have been 303,000. For all recoveries that have lasted at least this long, the annual rate of job growth at this stage was 3.1%, almost twice that of today’s pace.
Employment in most industries expanded last month. Construction added 46,000 jobs, and continues to be a dependable source of growth, even as the housing market appears to be cooling (a statement by the BLS suggested that warmer-than-usual temperatures last month may have played a role in the job additions). Factory employment was up slightly, by 7,000 jobs, exclusively in durable goods. Interestingly, over the past few months, employment among production workers (as opposed to managers) in manufacturing has grown more quickly than the overall sector, suggesting a possible occupational shift favoring blue-collar workers.
Among the services, employment was up 135,000, with gains in all major sectors except retail trade and information services, both of which have been laggards in recent months. Employment in information services, a sector that includes telecom and internet publishing, is down 18% since the economic peak of March 2001. Recent weakness in retail employment may reflect weakening consumer demand as reflected in the weak GDP report for 2005q4 (it may also reflect displacements due to a shift to internet purchases, leading to less activity on the sales floor of retail establishments).
The decline in unemployment was accompanied by increases in employment rates for some groups, particularly Hispanic workers (up one percentage point), and high-school dropouts, up 0.8 points. While monthly changes in this value can be unstable, over the past year, employment rates are up half a point over all, 0.9 points for African Americans, 1.7 points for Hispanics, and 1.3 points for high-school dropouts, a sign that the tightening job market is reaching less-advantaged workers.
Another positively evolving sign is the improvement in the extent of long-term unemployment, measured as the share of the jobless who have been without work for at least half a year. This share, which was stuck at or above 20% for 32 months, has fallen from 21% last January to 16.3% last month.
As noted, over the past year, the hourly wages of blue-collar factory workers and non-managers in services are up 3.3%, and weekly earnings are up 3.6%. Both of these measures have accelerated in recent months, as the job market has tightened. However, with inflation running at 3.4% (December 2004 to December 2005), these wage gains translate into only marginal improvements in buying power.
While some analysts worry that this increase in the rate of wage growth will create inflationary pressures, it remains the case that underlying productivity growth, despite a weak report for 2005q4, remains strong, and that other, broader measures of compensation are well within a non-inflationary range. (See Wage Picture.)
In this regard, it is important for economic policy makers, particularly the Fed, to allow the job market to continue to tighten, so that enough pressure can build to generate persistent real earnings gains. Recall that this scenario characterized the latter half of the 1990s, when accelerated productivity growth helped finance broadly shared increases in real earnings, something that has yet to occur in this expansion.
Finally, we note that the Bureau’s benchmark revision to the establishment survey—the annual adjustment to the number of jobs in the survey according to a census of the nation’s firms—led to a slight reduction of 158,000 in the number of jobs over the past year. In fact, benchmark revisions have been negative four out of the past five years. This is important because some analysts have claimed that the establishment survey was significantly undercounting the number of jobs added over the last several years. The negative adjustments belie this claim.
Today’s report was written by EPI economist Jared Bernstein, with research assistance from Yulia Fungard.
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