This Friday morning at 8:30, the Bureau of Labor Statistics will release the jobs report for June. Those of us who scrutinize such things will be watching closely to see if there’s a bounce-back from last month’s dismal count of 38,000 jobs. The consensus expectation is for 180,000, but last month, the consensus was for around 160,000, so you’ve got to take these monthly guesses with a big grain of sodium.
If you take an average of the monthly job gains from 2012 forward, you come up with about 200,000 jobs per month, and many job watchers got used to that number, such that months that came in under 200,000 were considered disappointing. But while we’re not yet at full employment – and obviously, the more jobs the better* – payroll numbers below 200K, say in the 100K-150K range, still represent a solid job market.
To see where I’m coming from, we need to talk about the “breakeven level” (BL) of job growth. The BL is the number of payroll jobs consistent with a steady unemployment rate. It’s a pretty straightforward calculation but it’s dependent on a few assumptions. For example, every BL is specific to a given unemployment rate and labor force participation rate (LFPR, or the share of the adult population that’s either working or looking for work).
These assumptions are necessary because having more people in the labor force implies we’ll need more jobs to employ the new entrants; similarly, a lower unemployment rate means the BL must account for new job holders.
The box below shows the monthly average BLs under four different scenarios for the LFPR and unemployment rate by late 2018: 1) both variables hold constant at today’s values, 2) unemployment falls gradually to 4 percent and the LFPR holds constant, 3) unemployment holds constant and the LFPR gradually rebounds by a percentage point, and 4) the unemployment rate falls and the LFPR grows by the amounts assumed in the earlier scenarios.
Before we get to the BLs themselves, let’s noodle over those assumptions for a minute. Most economists still think an unemployment rate of around 5 percent is the lowest rate consistent with stable inflation. But at this point, that’s more force of habit than rigorous analysis. After all, unemployment’s fallen sharply over the last few years while inflation’s hardly budged. So I can easily defend shooting for 4 percent unemployment while keeping a close eye on inflation.
The LFPR is trickier. It’s down more than three percentage points from its pre-recession peak, but part of that decline is due to retiring baby boomers. It’s hard to say how much of those three points we could get back in a truly full employment economy, but I’d argue at least one point is up for grabs.
Now, let’s look at the breakeven box. It really reduces to a simple point: given the progress we’ve made in the job market and the growth in our working-age population, monthly job gains of roughly 100,000 aren’t cause for alarm. While much lower numbers, like May’s initial count (we’ll see if it gets revised on Friday), are unacceptably low, we can still make with payroll gains below 200,000.
That doesn’t mean, of course, that we—and by “we” I mean the Fed—should be constrained by these BLs. The underemployment rate, at 9.7 percent, is still at least a point too high, elevated by millions of part-timers who seek full-time work. And though the overall LFPR has fallen in part because of retirement, it’s depressed for “prime-age” workers (25-54 year olds) as well. That’s partially a long-term trend, too, so it would be hard to achieve past peaks on that measure, but there’s definitely room for growth there. Faster job growth will help tighten things up sooner rather than later.
With that background, tune back in on Friday and we’ll see how we’re doing relative to these benchmarks.
*That’s not obvious if you’re an inflation hawk, but the correlation between the tightening job market and price pressures has been persistently very low.