June 6, 2008
Mounting recessionary signs as unemployment rate spikes
by Jared Bernstein with research assistance from James Lin
The nation’s job market showed clear signs of recessionary conditions as the jobless rate leapt up a half percent in May, from 5.0% to 5.5%, according to today’s report from the Bureau of Labor Statistics. This monthly increase was the largest since the mid-1980s, pushing unemployment to its highest rate since late 2004.
Payrolls contracted for the fifth month in a row, down 49,000 with most of the net job losses occurring in the construction industry, factories, offices, and retailers. Since total payrolls (public and private sector) peaked last December, they are down by 324,000 jobs. Since the government sector tends to be less cyclically affected by downturns, looking at just private-sector job loss can provide a more accurate gauge of the lagging economy’s impact on job growth; private-sector employment has fallen over the past six months by 411,000.
Although single month jumps in unemployment data should be judged cautiously, various factors suggest the spike in unemployment is not likely to be a statistical aberration and instead accurately reflects the weakening job market. First, it is consistent with the steady loss of jobs in the more accurate payroll survey. Second, as noted by the commissioner of the BLS, “The over-the-month jump in unemployment reflected additional workers who had lost their jobs as well as an upsurge in new and returning jobseekers.”
This latter point is important. The labor market expanded sharply last month—up over 500,000—and, in a very typical recessionary scenario, when jobseekers enter a labor market that is contracting, unemployment rises. This dynamic also contributed to a jump in the share of long-term unemployed, from 17.8% last month to 18.3% in May.
An increase in the youth labor force played a role in May’s unemployment spike. However, even if we take teenagers out of the data, unemployment still rises from 4.5% to 4.8%, a considerable 0.3% increase, and well above the 4.0% adult rate of one-year ago.
The BLS reports that the number of unemployed grew by over 800,000 last month, but such monthly data can be too “noisy” to give a clear signal of the growth in the number of jobless. Averaging over the past three months, and comparing this to an average over the same three-month period a year ago, shows that number of unemployed is up by 1.2 million.
The unemployed are but a subset of workers who are unable to find the type of jobs they seek, especially when the job market is weakening. As a result, the BLS also publishes an underemployment measure that captures the officially jobless plus a variety of other underutilized workers, most notably those part-timers who would prefer full-time work, a group that is up 760,000 over the past year. The underemployment rate hit 9.7% last month, up from 8.3% one year ago.
Most industries shed jobs last month, with losses continuing in manufacturing (-26,000), construction (-34,000, both residential and non-residential), retail trade (-27,000), and professional services (office jobs, down 39,000). The loss in professional services was dominated by a loss of 30,000 jobs in temp work last month, and 150,000 over the past year. The loss of temp jobs is often a bellwether in a recession as employers shed these workers first.
Health care continues to be the one solidly reliable sector, bucking the cycle and adding 34,000 jobs last month. The public sector, typically counter-cyclical, added 17,000 jobs in May, all at the local level.
Hourly earnings were up 3.5% over the past year, the same annual growth rate as last month, and the slowest since February 2006. Given stagnant growth in hours worked, weekly earnings grew less, up 3.2% over the year. Since inflation is running at around 4.0%, this implies continued losses in the buying power for most workers.
Whether or not we are in the midst of an official recession, the nation’s economy has been growing well below its potential for the past six months. Even with the stimulative boosts from Federal Reserve interest rate cuts and fiscal stimulus (rebate checks, which are yet to be felt in the job market), this weak growth period has led to a protracted loss of jobs, and as of last month, a sharp spike in joblessness. Almost 10% of the workforce is unemployed or underemployed. Long-term unemployment is high, as job losses make it particularly tough for the jobless to leave the unemployment rolls. Weekly earnings, reflecting both slower hourly wage growth and diminished weekly hours, are falling well behind inflation.
These recessionary conditions in the job market are hurting the living standards of working families and call for a renewed response from policy makers. The first order of business must be to ensure a durable safety net to catch the rising number of persons stuck in unemployment by extending unemployment insurance benefits.
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