What to Watch on Jobs Day: Putting employment growth in perspective in advance of Friday’s Jobs Report
Over the last several months, the pace of job growth has noticeably slowed, even after accounting for the large drag in last month’s payroll numbers exerted by the now-resolved Verizon strike. May’s payroll job growth of 38,000 brought average monthly job growth down to 116,000 jobs the past three months, and 150,000 this year so far. Adding the roughly 40,000 striking Verizon workers in May back in only pushes these numbers to about 129,000 and 159,000, respectively. Maybe these recent trends are just a blip, and we’ll soon return to a faster pace of job growth. But if not, we are looking at a marked slowdown compared to last year (which averaged 229,000 per month) and even slower than 2014 (which averaged 261,000 per month).
While the pace of job growth should be expected to slow as the economy approaches full employment, it’s not clear that we should rest easy that this is the explanation for any recent slowdown. After all, many indicators tell us we are still far from full employment (e.g. prime-age EPOPs and nominal wage growth) and May’s rate of growth was not even strong enough to keep up with growth in the working age population (again, even if we add in the striking Verizon workers). So, how much job growth do we need to not only keep up with population growth (which is the only job growth needed if the economy truly is at full employment), but to see lower rates of unemployment and greater participation in the labor force (assuming that we’re not yet at full employment).
First, let’s calculate just how many jobs we’d need to add each month to keep up with the growth in the working age population—or more specifically, to keep up with the size of the labor force. The CBO’s projections take the changing demographics of the labor force into account, which makes their estimates helpful for this exercise. CBO also projects that the unemployment rate will average 4.7 percent in 2016, which conveniently matches the actual unemployment rate for May. If we hold the unemployment rate constant and project out payroll employment in 2017, we see that if the economy simply treaded water, we would need to add about 100,000 jobs per month to keep up with growth in the labor force over the next year.
Now, let’s alter the scenario in two key ways: lowering unemployment and increasing labor force participation.
First, let’s consider a scenario where the unemployment rate falls to 4 percent over the next year. This should not be unreasonable—the unemployment rate actually fell below 4 percent for five months in 2000, without sparking an inflationary spiral. Given the labor force participation projected by CBO, a drop in the unemployment rate of that magnitude would mean an average monthly growth rate of about 185,000, or about 85,000 more jobs per month than at the steady state level of employment.
Now, let’s imagine that labor force participation is still depressed because of deficient aggregate demand. Yes, there are structural reasons why the labor force participation rate is declining as well, but there’s also reason to believe that it will pick up in a stronger economy. Given the recent dramatic dip in participation, our estimate of the number of workers missing from the labor force shot back up to 3 million last month. What if we added back in just 1 million of those workers in the next year? If the unemployment rate falls and employment picks up, then we would expect workers to be more optimistic about their job prospects and re-enter the labor force. In this case, if we were to soak up projected increases in the labor force, have unemployment fall to 4 percent, and boost participation by 1 million workers over the next year, we would need to add about 260,000 jobs each month.
When looking at payroll employment and assessing the strength of job growth, it’s important to keep these benchmarks in mind. Yes, as we get closer to full employment the pace of monthly job growth should slow a bit. But empirical measures still indicate that we should be hoping for substantially faster job growth than we’ve been seeing in recent months.