Rock Steady: Job market in steady groove, closing in on full emp (but not there yet)

October 7th, 2016 at 9:24 am

Payrolls rose 156,000 last month and the unemployment rate ticked up slightly as more workers came into the steadily improving job market, which continues to close in on full employment, with no signs of overheating. Most importantly, a) the steady progress appears to be pulling some of the missing workforce back into the job market, and b) as the job market tightens, the bargaining clout of middle-wage and lower-paid workers is getting a boost, and that’s helping to nudge up the pace of wage growth.

Note that while some politically motivated types may try to make a big deal over the increase in the unemployment rate—there is an election out there, after all—it actually rose from 4.92 percent to 4.96 percent, statistically indistinguishable from no increase at all. And that increase was largely due to over 400,000 people coming into the labor force last month, a positive development.

To get at the underlying trend in job growth, it’s important to smooth out the monthly noise. Over the past three months, job gains have averaged 192,000, about the same trend as over the past year, and a slight acceleration over the last six months.

Source: BLS, my calculations

Source: BLS, my calculations

Now, let’s get under the hood and tick through some of the key indicators in today’s report:

–The labor force participation rate ticked up to 62.9 percent last month, its highest point since February and a half-a-point higher than a year ago. It still remains well below—about 3 percentage points below–its 2007 peak, though part of this decline is due to aging boomers’ retirements. Most economists believe that a strong job market could claw back at least one of those percentage points, which amounts to 1.6 million workers in today’s labor market, so even slow progress on this front is very welcomed.

–A better metric for a quick look at labor demand is the employment rate for prime-age (25-54) workers, which also ticked up last month, from 77.8 to 78 percent. This important variable also got whacked hard by the downturn but has made back about 2/3’s of its loss (see here for more detail on the important, long-term negative trend in employment rates). Over the past year, it is up 0.7 percentage points.

–The underemployment rate, which includes the 5.9 million part-timers who want full-time jobs, is stubbornly stuck at an elevated 9.7 percent, which is where it has been since July. I estimate that an underemployment rate in the mid-8’s is consistent with full employment, so this is one of the stronger indicators showing that we’re not yet where we need to be.

–Manufacturing employment fell 13,000 last month and is down 58,000 so far this year. Since 2015, job growth in the factory sector has been flat, after rising over 300,000 from 2013-14. One factor in play here is the stronger dollar (along with slower growth abroad), which has made our exports more expensive in foreign markets, generating competitive pressures for our manufacturers. Given the political salience of this issue in the current election, it’s important to note that the stronger dollar is far more a function of relative growth rates and the plans of our Fed to raise rates than it is evidence of currency manipulation. (That’s not to say we shouldn’t worry about currency manipulation—I still take my umbrella even when the sun’s out.)

–Wages! I’ve long argued that as the job market tightens up, middle and low-wage workers get more bargaining clout, which in turn helps steer more of the economy’s growth their way. After being stuck at around 2 percent for years, average hourly wage growth has trended up and is up 2.6 percent over the past year (see figure). Fed Chair Janet Yellen has argued that 3.5 percent is the non-inflationary ceiling for wage growth (compensation, really, but we only get the wage part in this report), so we’re still well below that target, with a lot more room to grow.

Source: BLS

Source: BLS

It is, of course, important when you’re talking wage growth to get away from the average: the blue-collar, non-manager wage has also accelerated, up 2.7 percent over the past year.

Bottom line, the job market is into a very steady groove, as employers continue to add jobs at a rate of around 160K-200K per month. That may be fast enough to pull workers in off the sidelines; it’s clearly enough to generate some wage pressures, though I hasten to add that they’ve been non-inflationary. We still have a ways to go on both underemployment and the employment rates of prime-age workers, but at least on the latter, the gap is closing. While the real value of the dollar in international markets has not grown much in recent months, its elevated level continues to take a toll on job growth in manufacturing.

Of course, this report will become fodder for the campaigns. The fact is that there’s nothing at all in this report, or much more importantly, the trend labor market data, to make a case that the US job situation is in terrible, horrible shape. Nothing, nada, zip. It’s not in the data. We’re not at full employment, and there are the negatives I just noted. But we’re moving in the right direction at a good clip, and that’s finally starting to steer some long-awaited wage growth to those who depend on paychecks as opposed to tax avoidance.

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2 comments in reply to "Rock Steady: Job market in steady groove, closing in on full emp (but not there yet)"

  1. Smith says:

    Doing the math:
    Reducing unemployment to 4.5% is 790,000 jobs
    Reducing underemployment to 8.5% is 786,667 jobs
    Pulling 3/4 of remaining 25-54 year olds back into labor force who left since 2007: 1,815,000*

    That’s a total of 3,391,000 jobs.
    You need 100,000 per month to keep up with population growth of prime age workers since population pyramids show youngest demographic (new entrants to workforce) roughly equals exiting boomer bulge (it matters not that the demographic just younger than boomers is smaller, only out vs. in, oldest and youngest).

    That’s two years and eight months of uninterrupted 200,000/month job growth, with a very conservative take on full employment. This allows for 4.5% unemployment, and 1/4 (600,000) of post recession labor force dropouts (excuse that expression) never making it back. Likewise, I’m skeptical 5 million part timers looking for full time work really represents full employment, but I’ll go with the 8.5% underemployment figure as full for now. At 175,000/month you’re looking at 4 years to full employment. You may say prosperity is just around the corner, and happy days are here again, but it doesn’t look that way to me.

    Agreed, the US job situation is not in terrible, horrible shape. But it is not in great shape either. Projecting full employment 3 to 4 years from now is no way to run an economy. That’s when wages would first start to pick up not dependent on a one time drop in oil prices (still working it’s way through the economy). That doesn’t begin to address inequality, stagnant wages, and overqualified overskilled underpaid workforce. College graduates can’t find jobs requiring a degree. That helps put those without degrees out of luck, out of work. Full employment is necessary but not sufficient to address inequality (the 1990s proved that) or stagnant wages (the 2000s proved that).

    4.5% is a dumbing down of full employment and my math shows Yellen shouldn’t be considering raising rates for years. Again the mantra should seep in, end the idea of controlling inflation with unemployment (listen to the Kennedy Nixon debates).

    *FRED Employment Level: 25 to 54 years: 100,461,000 Dec 2007 to 98,204,000 Sep 2016 plus 10% natural population increase from 2007 to now, about 200,000 to the 2,200,000 difference. I’m agreeing with most economists, give or take a few 100,000 (above post posits 1.6 million come back vs my 1.8)

  2. urban legend says:

    A 59.8% employment-to-population ratio that has been barely moving for two years doesn’t look like “closing in” on full employment to me. It’s still almost five percentage points (equivalent to 12.5 million jobs) below its peak in 2000. The ratio for 25-40 year olds is still weak, too, so the demographic excuses for the low general rate (16+) do not work. Of course, the Republicans refusing to act on reasonable job-growth programs are primarily responsible for depressing the desired bounce-back