June jobs: continued, solid gains, but that 5.3% unemployment rate makes the job market look tighter than it is

July 2nd, 2015 at 9:26 am

Today’s jobs report was a bit weaker than expected, and a bit weaker than it looked at first blush. While payrolls were up 223,000 in June, in line with expectations, and the unemployment rate fell to a record low in this recovery of 5.3%, mitigating factors include:

–downward revisions in payrolls for April and May of 60,000 combined;

–the fall in unemployment was exclusively due to people leaving the labor force, not jobseekers finding work;

–thus, the labor force participation rate ticked down a significant 0.3 percentage points to 62.6%, its lowest level since the late 1970s, though see below re this important trend;

–hourly wage growth was flat in June, and is up 2% over the past year, a slight deceleration from last month’s report;

–average weekly hours worked were also unchanged, so weekly earnings were also up 2%;

–factory employment growth remains weak, up 4,000 and little changed over the past five months (construction was also a weak spot in June, adding no net new jobs).

On the upside, the payroll gains continue to be solid, with employers hiring north of 200,000 workers per month on average (see smoother analysis below), and hiring was robust across much of the service sector. The number of involuntary part-timers continues to decline, and is now down about a million from last year. Long-term unemployment continues to decline as well.

The decline in June’s labor force could, of course, be monthly noise, and in fact, the BLS noted that this variable tends to volatile this time of year, as more people than usual are churning in and out of the job market. There’s also an important structural dimension to the decline in the LFPR, as the older age composition of today’s workforce renders comparisons to the 1970s not particularly valid. But as the job market has gradually tightened, I’ve expected to see some upward movement in the LFPR, as labor demand pulled more people into the workforce. The fact that this has yet to occur suggests that there is much more slack than the 5.3% unemployment rate suggests.

To get a better feel for the underlying trend in net job creation, we turn to our patented smoother chart showing monthly averages over 3, 6, and 12 month intervals. Over the past three months, payrolls are up about 220,000 per month, about the same as June, and a slight deceleration from 12-month trend.

smooth_7_15

Source: BLS, my calculations.

As noted, that 220K trend represents a solid pace of job growth that will eventually, if it persists, help to squeeze out the remaining slack in the job market. But the relatively weak wage growth, the strong-dollar induced weaker manufacturing sector, and the lack of growth in the labor force tells that this is not a “5.3% job market.”

That rate happens to be just about what the Fed considers to be the unemployment rate commensurate with full employment, and based on the bullet points above, that can’t be right. For example, surely, if we were this close to full employment, we’d see more pressure on wage growth. The fact that we clearly do not tells us that a) the measured unemployment rate is biased down, and b) the Fed is having trouble figuring out the natural rate.

That, in turn, implies that talk of raising interest rates is simply premature, full stop. I understand that rates have been very low for very long, and that many Fed critics (and a few Fed governors) are champing at the bit to raise. But when Chair Yellen says they’re “data driven,” I believe her. And the data—while not bad by any means—are not yet consistently strong enough to warrant a change in interest rate policy.

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6 comments in reply to "June jobs: continued, solid gains, but that 5.3% unemployment rate makes the job market look tighter than it is"

  1. Aaron Morrow says:

    Looking at the employment-population ratios for 16+ and 25-54, it looks like June data equals the three month data equals the six month data (59.3% of 16+ and 77.2% of 25-54). So far in 2015, payroll growth has managed to equal population growth.


  2. SeattleAlex says:

    So confused. So we’re just getting old? Or is there some theory other than population age and ‘seasonal volatility’ to explain the persistent drop in labor force participation given that long term unemployment isn’t even contributing…also triple gold star to JB for being the only person ever to spell ‘champing’ at the bit correctly.


  3. Bud Meyers says:

    “The fall in unemployment was exclusively due to people leaving the labor force, not job seekers finding work”

    But today on MSNBC (or was it on CNN?), when asked about the 40-year-low, I heard you say that the labor force participation rate wasn’t as big a deal today as it was 40 years ago…what did you mean by that?

    You attributed it to the Boomers leaving the work force — but they are retiring, making room for prime age workers.

    BTW — The Fed and BLS predict the decline in the LFPR throught 2022. So you’re saying we shouldn’t be concerned with a growing population who can’t find jobs?

    http://www.bls.gov/opub/mlr/2013/article/labor-force-projections-to-2022-the-labor-force-participation-rate-continues-to-fall.htm


    • Jared Bernstein says:

      Sorry for the confusion. I’m saying that to say the LFPR is “the lowest its been since 1977” is not quite right because we’d expect it to be lower now relative to then given the much older workforce now. But it should be higher than it is. It peaked at 66% before the down turn and is now below 63%…I think we could get back maybe a point if not more of that loss from 66 to 63.


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