Deeper Dive into the Jobs Report: Labor Force Participation and Weekly Earnings

March 8th, 2013 at 6:34 pm

Today’s jobs report is widely being viewed as a sign of an improving job market, a view I share with (of course) caveats.  The biggest question is, as I noted earlier, whether the recent acceleration of payroll growth sticks, especially as the sequester takes hold, which is hasn’t yet.  So far, both the stock and the job markets have said “sequester?…what’s a sequester?”

A few things jumped out at me that you might find interesting.

Labor Force Participation: First, there’s the tick down in the labor force participation rate, explaining part of the decline in unemployment and one of not-so-bright parts of the report.  I’ve heard some commentators suggest that this is due to unemployed people giving up and dropping out of the job market (remember, you’re not counted as unemployed if you’ve given up looking).

But the data show that not to be the case.  The BLS—and yes, I’ll admit it, I love the BLS—publishes data on flows in and out of the labor force, and the figure below shows the monthly trend from unemployed to NILF (not in labor force).  It’s a jumpy series, but it clearly went up a lot in the heart of the recession but has flattened and drifted down since (though it ticked up last month).

flow1

Source: BLS

So why is the labor participation rate (LFPR) stuck in the tank, or slightly more technically, about 2.5 points below its pre-recession peak (Dec07-Feb13)?  Certainly, weak labor demand is the big story.  But it’s not the only factor at play—research has attributed one-quarter to one-third of the decline to older workers leaving the workforce, presumably for retirement.

The flows data can also be used to decompose this decline in the LFPR between five flows (in order of the bars of the figure):

–not in labor force to labor force
–employed to employed (kept working)
–unemployed to unemployed (kept looking for work)
–un to emp and emp to un

lf_decl

Source: BLS, my analysis

By far the largest of these shares at any point in time is people who kept working and the drop in this share more than explains the decline, consistent with cyclical job losses driving the rate down.  As unemployment is still elevated, the unemployed share of the labor force goes up, which is why the un-to-un bar is a positive factor.  Interestingly, over this period flows from NILF into the labor force have actually boosted the participation rate a bit.

Weekly Earnings: With both weekly hours and hourly wages up last month, weekly earnings got a nice 0.5% bump last month—that’s before inflation, btw.  On an annualized basis, that just below 6%, so a nice pace if it can be sustained.  But don’t go popping corks yet—paychecks haven’t caught up with the stock market.

The figure below shows the nominal year-over-year growth in weekly earnings, a better way to suss out the trend.  Their growth got slammed in the heart of the downturn—an hours’ story more than an hourly wage one—but climbed back when jobs and hours began to expand.  But they’re been trending down since.

wg1

Source: BLS

Inflation has been running low, thankfully, below 2% in recent months, so in real terms weekly earnings have been flat.  But remember, this is the average, combining high-wage workers with low-wage ones.  The latter face higher unemployment and have seen worse wage outcomes relative to higher earners.

So, yes—a pretty solid jobs report with a decent payroll number.  But unemployment is still high, the LFPR shows evidence of continued weak demand, and that’s taking its toll on wage growth.  We’ll need a lot more months like this to get back on track.

 

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13 comments in reply to "Deeper Dive into the Jobs Report: Labor Force Participation and Weekly Earnings"

  1. Kevin Rica says:

    “But it’s not the only factor at play—research has attributed one-quarter to one-third of the decline to older workers leaving the workforce, predumably for retirement.”

    That makes it worse. Involuntary retirement deprives people of the chance to save for their old age when they will really need it and begins depleting their savings too early.

    The only difference between involuntary unemployment and involuntary retirement is which pot they take their benefits from.


    • DonB says:

      Certainly many older workers are finding they do not have enough savings, pension, etc. to retire with only Social Security income and thus for them leaving the workforce would be involuntary. But fortunately there are increasing numbers of workers crossing the 65 age threshold, currently some 10,000 every day, and increasing.

      That a growing number of these workers, plus the number that are even older and have delayed their retirement until they do have enough to live on, or have lowered their expectations, are voluntarily retiring should not be surprising. Those that simply can no longer work because of health problems is also part of this “voluntary retiree” group.


  2. mike smitka says:

    Many months?! … I use Census population projections by age bracket, and pre-recession age-to-employment numbers to calculate “normal” employment. When I do that, our steady but mediocre jobs growth gets us back in another 72 months, that is, 2019. See the graph on my undergrad senior course blog here. I also did this calculation using employment less those on short hours, with the same overall result.

    Now as time passes population growth, overall employment growth, debt repayment and continued increases in housing prices will leave fewer underwater on their mortgages. That will bolster consumption and growth. At the same time, I would bet that we see at least one hiccup over the next half-dozen years, on a generic historic basis. (The politics that have given us the sequester will be with us at least until the end of 2014…and possibly through 2016.) So months = 72 remains my educated guess.


  3. urban legend says:

    Why do we talk as if the LFPR of 2007 was some great benchmark (difference of 2.5 percentage points from then)? The labor market then, with an LFPR of 66.0%, was pumped up artificially by the gigantic housing bubble. Yet it still was substantially lower than it had been in 2000, which would seem to be a better benchmark. The current rate is almost four percentage points down from the 67.4% peak in 2000 — perhaps inflated some by the stock market bubble, but not nearly as much as by the housing bubble. That difference represents about 10 million people out of the active work force who probably would jump back in if jobs were plentiful. Some are natural exits — more baby boom retirees — but that has been so far a relatively small portion of the AWOL potential workers.


  4. Frank says:

    Can someone explain why the “employed to employed, (kept working)” is even a “flow” that affects the participation rate? If someone just goes to another job, why does that influence the LPR? Unless they are captured by the survey while they are between jobs?


    • Jared Bernstein says:

      Good question…’flow’ just means, in this context, what’s your labor market status this month compared to last month? Since most people don’t move month-to-month, we call staying where you are part of a flow.

      Here’s everything you want to know about this: http://www.bls.gov/cps/cps_flows.htm


  5. save_the_rustbelt says:

    Too many jobs are being created at 1970s wages.

    Underemployment is going to be the story of this decade. The joy of globalization and a flood of undocumented workers.


    • Peter K. says:

      The joy of the Republican party’s fiscal policies. The public needs to be educated and the Republicans driven from power. Globalization and immigrants are red herrings.


  6. Fred Donaldson says:

    If you lose your job at age 60, for example, and unemployment runs out and you sent 500 resumes, and no response, is that “leaving” the workforce or just hopeless unemployment?


  7. Peter K. says:

    “Inflation has been running low, thankfully, below 2% in recent months,”

    I would rather that it was running higher at 3 or 4 percent as is did during Ronnie Raygun’s recovery. Low inflation is a symptom of a weak economy. Higher inflation would also be easing debt loads. But I see your point.


    • Jared Bernstein says:

      Good point–as you suggest, I was talking about the dif between falling or flat real wages. And while I support the inflation argument behind your comment, I do believe that those who make it a) overestimate the fed’s ability/willingness to increase the rate of price growth, and b) its impact on real wages.


  8. Fred says:

    Look at a chart for GDP growth in this country its been in decline for years. Look at the same for manufacturing latter is lower today than it was in summer of 2010. Jobs: +236K good – 130K who dropped put of labor force -38K downward Jan rev1sion not good + 23K upward revision for Dec good. nothing to get too excited about they do get downright euphoric about it.An excellent lesson for those who still confuse the markets with the economy.


  9. purple says:

    Many of the older people leaving the workforce are broke, and really need some extra income.

    Only so many Walmart greeter jobs to go around.


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