April 7, 2006
Steadily improving job market, but little sign of inflationary pressure
Payrolls expanded by 211,000 and unemployment ticked down slightly last month to 4.7%, according to today’s report from the Bureau of Labor Statistics (BLS). Although the U.S. labor market continues to expand at a steady rate, wage gains were moderate, and weekly hours were unchanged, providing little evidence of any “resource constraints” or inflationary pressures emanating from the job market.
As in recent months, most industries were hiring in March, with the notable exception of the factory sector, where manufacturing employment contracted slightly (down 5,000) for the second straight month. Over the past year, payrolls have expanded at an average rate of 174,000 per month. Excluding the two months in which job growth was depressed by the Gulf Coast hurricanes, the average over the past year has been growth of 200,000 jobs a month, a rate consistent with population and labor force growth.
Today’s release marks the fifth year since the last business cycle peak in March 2001. Although the recession was relatively mild in terms of its effect on gross domestic product, the long jobless recovery that ensued created a lasting jobs deficit. As the chart below reveals, the percent growth in employment was far lower in this cycle than in any other that has lasted at least this long. Employment is up 1.9% over the five years since March 2001, compared to 6.8% in the last cycle, and 9.7% on average (the average excludes the current cycle).1
Thus, the good news is that employment growth appears to have settled into a solid trend of steady gains. On the other hand, given the weak jobs record of the last five years, some slack remains in the job market.
Although the unemployment rate is low in historical terms—March’s rate of 4.7% matches the lowest rate achieved over this recovery—wages are growing at a moderate rate, and they even decelerated slightly last month. Compared to a year ago, hourly wages are up 3.4% and weekly earnings have increased by 3.7%. Both rates are in the neighborhood of the consumer price index’s inflation rate, which was up 3.6% in the most recent release, covering the 12 months ending in February 2006. As a result, wages have been essentially stagnant in real terms.
Today’s BLS report includes other positive indicators of improvement in the job market. The number of part-time workers who would prefer a full-time job fell to its lowest level since August 2001. This helped drive the “underemployment rate”—the BLS’s broadest measure of under-utilization-down to 8.2%, from as high as 10.4% in September 2003. In addition, the length of unemployment spells fell in March, reversing an upward spike in February.
In one measure of moderated labor demand, weekly hours were flat last month and have shown no positive trend over the past few years, even while job growth has increased. At 33.8 hours per week, the hours of private sector workers in non-management and blue-collar jobs are down three-tenths of an hour during this business cycle (i.e., since March 2001). By contrast, at this time in the 1990s expansion, hours had returned to their peak level.
As noted, most industries continued to add jobs last month. Professional services had a strong month, adding 52,000 jobs. Employment in that sector grew both at the high end of the wage scale (professional services up 21,000) and the lower end (temp work up 16,000). Despite reports of tepid sales in March, retail employment was up 29,000, its best month since last November. The financial, health, and leisure sectors were also significant gainers in March.
Two important sectors continue to lag: manufacturing and information services (the latter includes IT services, such as Internet publishing). Factory employment is down 15,000 in the past two months, but over the longer term the United States’ large and growing trade deficit in manufactured goods has contributed to a decline of 2.7 million U.S. jobs over the five-year cycle.
This decline of 16% in factory employment over the past five years is by far the largest on record for expansions that have lasted this long (the average is about -a 1% decline; in the 1990s recovery, manufacturing employment fell 2.7% over the comparable period). Thus far in this expansion, manufacturing’s share of total employment has fallen from 12.8% to 10.5%. A shift of this magnitude over a relatively short time period suggests an acceleration of an important structural shift in the composition of employment in the United States.
Summarizing today’s report, some economists view the current labor market as in the “Goldilocks” zone: neither too hot nor too cold. That view is accurate in that the job market appears to be percolating along at a steady rate, absorbing population growth without threatening to create inflationary bottlenecks. While wage growth has accelerated in recent months, it moderated in March, and we are hopefully nearing a period of sustained real wage gains for working families.
However, the positive, evolving trend in employment growth should not cause us to lose sight of the longer-term picture, which reveals a historically weak record of employment growth over this cycle. The long, jobless recovery did lasting damage, and we still have a jobs deficit. For the benefits of this five-year old cycle to reach those responsible for its progress—the broad working class—the progress in recent months needs to be sustained.
—By Jared Bernstein with research assistance by Yulia Fungard.
1. While the establishment survey is the preferred source for such analysis, the household survey shows a similar relationship in terms of relative growth rates over cycles. Employment from this survey is up 4.3% in this cycle compared to 8.5% on average.
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