What to Watch on Jobs Day: Signs of a Tightening Labor Market?
The economy is slowly recovering from the Great Recession. We saw stronger job growth in 2014 than in 2013 or 2012. In 2015, I hope to see signs of even stronger job growth, pulling the missing workers back into the labor force, and achieving decent, if not strong, wage growth for most. I’ll be looking at these factors when the jobs report comes out tomorrow and throughout the year.
First, jobs growth. If we continue to see the average rate of job growth experienced in 2014, it will be the summer of 2017 when we return to pre-recession labor market health. 2014’s rate of job growth was a positive step, but I’m hoping for even more.
Second, labor force participation. While the unemployment rate continued to fall through 2014, it remains elevated across the population (by age, race, gender, education, sector, occupation)—and even so, it does not reflect the full picture of the labor market. Some of the decline is due to an increase in employment, but some of it is due to a drop in labor force participation. Between November and December 2014, 70 percent of the decline in the number of unemployed people was caused not by workers finding jobs but by people leaving the labor force, or not entering it in the first place.
To better explain this trend, we’ve been tracking what we call the “missing workers.” These are people who have left (or never entered) the labor force, but who would be working or looking for work if job opportunities were significantly more robust. Because jobless workers are only counted as unemployed if they are actively seeking work, these missing workers are not reflected in the official (U3) unemployment rate. We compare today’s labor force participation rate with projections based solely on structural changes in the workforce—like the retiring baby boomers—and find that there are currently 6.1 million missing workers. If these missing workers were actively looking for work, the unemployment rate would be 9.1 percent.
Lately, I’ve gotten questions about the fact that the number of missing workers hasn’t been coming down, even though the economy is ostensibly improving. It’s true that the number of missing workers has hovered around 6 million for over a year now. But, keep in mind that we’re also seeing population growth and, most importantly, growth in the working age population—so, for the missing workers number to come down significantly, job growth needs to be even stronger.
The third factor I’m watching, which is a sign that there is still tremendous slack in the labor market, is the fact that nominal wage growth is far below target. The average annual growth rate in nominal hourly wages was 2.0 percent between 2013 and 2014. We will continue tracking all the wage series available and advise the Federal Reserve to restrain from putting the brakes on the economy until there is actually strong wage growth, which can begin to claw back labor share. Until then, the sluggish wage growth we’ve seen is simply another sign that we are far from a full recovery.