Job growth has noticeably slowed, but slack remains

Over the last several months, the pace of job growth has noticeably slowed. May’s payroll job growth of 138,000 brought average monthly job growth down to just 121,000 jobs the past three months, and 162,000 this year so far. In comparison, payroll employment growth averaged 187,000 in 2016 and 226,000 in 2015. 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 seem to be telling us that we have not yet reached full employment. For instance, the prime-age employment-to-population ratio remains significantly below its high points in previous recoveries, meaning there is likely still slack from the Great Recession and its aftermath as would-be workers sit on the sidelines and would likely get back in the game as jobs are created and wages increase.

Furthermore, gains in nominal wage growth have slowed in the past few months, with year-over-year wage growth averaging 2.5 percent over the last three months, down from 2.7 percent in the six months prior, which is still far-below the target growth rate of 3.5 percent. While the economy has been adding jobs for years now, a stronger economy would mean higher wages and faster wager growth. At the current rate of growth, it is clear that employers need to do little to attract and retain the workers they want and any significant signs of labor shortages are simply not showing up in the data.

First economic scenario: Treading water

For now, let’s return to the topline payroll numbers. With the publication of the latest CBO projections, we can assess how much job growth 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). For those who just want the quick and dirty answer, please skip to the figure below. For those who want a bit more detail, keep reading.

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 4.4 percent in 2017, which conveniently is the average unemployment rate over the last three months. If we hold the unemployment rate constant and project out payroll employment in 2018, we see that if the economy simply treaded water, we would need to add about 90,000 jobs per month to keep up with growth in the labor force over the next year.

Economic scenario number two: lowering unemployment

First, let’s consider a scenario where the unemployment rate falls to 4 percent over the next year. This should not be considered obviously 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 146,000, or about 56,000 more jobs per month than at the steady state level of employment.

Third economic scenario: lower unemployment and increase labor force participation

Now, let’s imagine that labor force participation is still depressed in part 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. Every month, workers enter jobs directly from outside the labor force, not necessarily from the counted unemployed, those without a job who specifically looked for work in the previous four weeks. There’s no reason to assume, given the continued slack, that that phenomenon won’t continue as the labor market strengthens.

So, let’s say we add back in some of those missing workers. If we added back in just 1 million of those in the next year, which would, all else equal, bring the current prime-age EPOP to a little less than half way back to its most recent high-point (assuming they were prime-age workers). 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 223,000 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. And, to put all the key indicators in perspective, check out EPI’s autopilot economy tracker to see how various labor market measures would perform each month if the economy continued inching towards full employment, as it has in the months and years leading up to 2017.