The US unemployment rate, at 4.9 percent, is the lowest since the Great Recession. It is also near the economy’s natural rate, as defined by the Congressional Budget Office. Why is this stellar figure not generating optimism, unleashing a virtuous circle of confidence and growth? The answer lies in the fact that mixed attitudes toward the employment picture reflect mixed patterns in the data.
Every reasonable economist understands that the unemployment rate fails to capture a host of other factors that determine the composition of the labor market, and that the unemployment rate is of limited utility as a comprehensive economic gauge. There is evidence on both a return to vitality and underlying weaknesses in the US labor market. Overall, the data suggest that workers need to upgrade their skills to overcome structural weaknesses in the labor market, which only grow with technological advancement. The government should thus play a role by offering training programs and wage loss insurance.
The unemployment rate fails to capture a host of other factors that determine the composition of the labor market.
An important starting point is the Federal Reserve’s Labor Market Conditions Index (LMCI), first introduced in May 2014 to acknowledge the labor market’s complexity. The LMCI includes 19 indicators from nine broader categories, placing higher weights on those whose movements are highly correlated.1 For the sixth consecutive month (January to June; see figure 1), the index has registered a negative value. Despite a strong June employment report, these more comprehensive data on the US labor market give a mixed signal.
Sources: Federal Reserve Board and Bureau of Labor Statistics.
A component of the LMCI that portrays the US labor market as dynamic and healthy is the Job Openings and Labor Turnover Survey (JOLTS)2, experimental data compiled by the Bureau of Labor Statistics (BLS). The data provide estimates of monthly job openings, hires, layoffs, and quits for six sizes of private firms. Aggregating these data (figure 2), both hiring and job openings have continued to surpass precrisis levels. This positive trend in employment growth is likely to slow as the economy reaches full employment.
Source: Bureau of Labor Statistics and author's calculations.
In addition to strong hiring, wage growth has continued to rebound, though it has yet to reach the precrisis average of 4 to 4.5 percent per year (figure 3). Median year-over-year wage growth for US workers reached 3.5 percent in May, well above a trough of 1.6 percent in mid-2010 and comfortably higher than the 2008–15 average of 2.6 percent. What’s more, median wage growth for job switchers3 has accelerated much faster than that for job stayers or the overall workforce since the beginning of the year. A corollary of this is an increasing quit rate4, as workers feel more confident leaving their jobs voluntarily to find better employment elsewhere.5 Add to this record low unemployment claims and the picture gets even stronger. July 9 marked 71 consecutive weeks with under 300,000 claims a week, the longest streak since 1973, better than a return to normalcy. An increasing quit rate, rising wage growth, and low unemployment claims certainly present a reason to be optimistic about the labor market.
Sources: Federal Reserve Bank of Atlanta and Bureau of Labor Statistics. Latest data are of June for job stayers/switchers and May for the quit rate.
Despite strong hiring and solid wage growth across the labor market, other data suggest the situation might be worse than suggested by the unemployment rate. These data go beyond the oft-discussed low labor force participation rate, dissected by Jason Furman in both a recent Foreign Affairs article and the 2016 Economic Report of the President.
A few indicators, though they have improved somewhat since the crisis, still remain stubbornly high and could signal lasting structural problems in the US labor market.6 First, the labor force share of those working part-time for economic reasons remains well above precrisis levels (figure 4). Not included in the official unemployment rate, this category refers to workers who desire full-time work but are able to find only part-time work. Federal Reserve analysis in 2014 was initially optimistic about this trend, pointing to cyclical forces as the primary culprit and claiming involuntary part-time employment would decrease as the labor market improved. New analysis by the Federal Reserve Bank of San Francisco tests the importance of structural factors such as industry composition, demographics, and general wage levels, finding that these factors have raised involuntary part-time work by 1 to 1.25 percent since 2006. This more recent analysis seems to have been confirmed by the data, a worrying sign.
Source: Bureau of Labor Statistics and author’s calculations.
Second, the total labor force share of discouraged workers, those who want a job but are not actively seeking one because they believe none are available for them, has not returned to precrisis levels (figure 4). The literature on discouraged workers remains disturbingly small. A 2014 brief by the Federal Reserve Bank of St. Louis plays down much of the risks, claiming that the category is transitory and not an “absorbing and permanent one.” Even if this is proven true empirically, the elevated share of discouraged workers as a percent of the total labor force merits further attention. Fundamental changes in the labor market, including hiring preferences of firms, may mean a larger pool of discouraged workers becomes a normal feature of the postcrisis US economy.
The Great Recession has left more than just a temporary bruise on the economy.
Third, and much like involuntary part-time work, long-term unemployment remains too high (figure 5). The average duration of unemployment still hovers around 27 weeks, compared with precrisis levels of around 17 weeks. The percent (out of total unemployment) of those unemployed 27 weeks (the official benchmark for “long term”) or longer remains around 25 percent. This is particularly troubling since those out of work for long periods tend to stay unemployed longer or drop out of the labor market altogether. That long-term unemployment tends to cut across industries, age, race, and gender calls for a comprehensive solution.
Source: Bureau of Labor Statistics and author’s calculations.
The US economy may technically be near full employment, but there is little doubt that the Great Recession has left more than just a temporary bruise on the economy. Strong hiring and solid wage growth combined with heightened long-term unemployment and involuntary part-time employment signal an incomplete recovery. The empirics increasingly suggest that this may be the new normal for the US labor market. That these negative trends cut across industries, geography, and demographics suggests the need for upgrading skills through better training programs or for measures such as wage loss insurance for displaced workers to encourage them to accept work, even at lower pay. Steps have been taken, but more can be done. Some have called for large “shovel-ready” public works program or even for the government to directly hire the long-term unemployed. No solution should be ruled out in fixing these persistent problems in US labor market.
1. Of the 19 indicators in its dynamic factor model of the labor market, the Fed reports that the unemployment rate, private payroll employment, composite help-wanted index, insured unemployment rate, quit rate, and persons working part-time for economic reasons are the most influential in the LMCI.
2. JOLTS data as of June 2016, with the next scheduled to be released August 10, 2016.
3. The Federal Reserve Bank of Atlanta defines job stayers as “people who are in the same occupation and industry as one year ago and who have had the same employer for the past three months,” while job switchers refer to everyone else.
4. The BLS defines the quit rate as employees who leave voluntarily, with the exception of retirements or transfers to other locations.
5. Even given higher wage growth for job switchers, other research has found decreased fluidity (lower job reallocation rates) after 2000 across industries and demographics, with potentially negative consequences for productivity, real wages, and employment.