Unemployment Rate Up 0.1% to 4.6%, But Ooutlook is for a Weaker Labor Market

The following excerpts from the Economic Policy Institute is a good analysis of the this month’s BLS press release on the unemployment rate and the outlook for the labor market in the coming months.

Job growth was weaker than expected in July, as the nation's payrolls expanded by 92,000 jobs, well below analysts' expectations of around 130,000, according to today's report from the Bureau of Labor Statistics (BLS). Hours worked also dipped slightly and the unemployment rate ticked up, from 4.5% to 4.6%. Though key sectors continue to reliably generate jobs, the report also highlights several concerns about where the job market is headed.

Is this level of job creation high enough to maintain tight job markets? Hourly wages continue to grow around 4.0% per year—up 3.9% in July compared to last year—and the jobless rate has hovered between 4.4% and 4.6% since last September. Thus, underlying conditions in the job market do not appear to have changed markedly this year.

Yet, barring an unexpected upturn in the overall economy, signs from today's and recent job reports suggest these key indicators are more likely to weaken than to strengthen in future months. As discussed below, two important reasons that unemployment has not climbed higher already are slower labor force growth and diminished participation (only persons actively seeking work are counted among the unemployed).

The number of unemployed, a volatile monthly series, spiked up by 188,000 in July. The share of the unemployed who were job losers (as opposed to new labor market entrants or re-entrants) jumped up to 50.9%, the highest share since September 2005. A one-month spike in the share of job losers by no means constitutes a worrisome trend, but this is a highly cyclical variable and warrants close watching in coming months.

Also, the share of long-term unemployed—persons who have sought jobs for at least 26 weeks—jumped in July, from 16.2% to 18.4%.

Given these weak results, why hasn't the unemployment rate gone up? In fact, job growth this year has been much weaker in the Household Survey, the database by which the BLS gauges unemployment. Monthly employment growth in this smaller survey is much more volatile than the payroll survey, but the monthly average job gains this year from this survey have been only 26,000, compared to 262,000 last year.

The reason such slow job growth has not translated into higher unemployment can be traced to the slower growing labor force and the decline in labor force participation rates (LFPRs) this year. Overall, the LFPR is down 0.3 percentage points since last December, but for men, it is down 0.5 points. Teenagers' LFPRs are down by 2.2 points this year, and even so-called prime-age workers—25-54 year-olds—are down slightly (-0.2 points). Surprisingly, LFPRs are down more among workers with higher levels of education, suggesting a tougher job market for workers with at least some college relative to those with less schooling.

If the 0.3 percentage points "missing" from the overall LFPR were actively seeking work, the jobless rate would be 4.9%, not its current level of 4.6%.

Those sectors contributing the most to job growth last month included health care, banks and insurers, business services, and restaurants. Health care has been by far the fastest growing sector, adding 36,000 jobs last month and 218,000 so far this year. The sector, which represents 9% of total employment, accounts for 23% of the job growth this year, and that same share—23%—over the full economic recovery, beginning in November 2001.

Once again, the jobs report shows no evidence of an inflationary threat from wage growth. Hourly wage growth, up 3.9% over last year, is neither speeding up nor slowing down. The one-tenth decline in average weekly hours led to a smaller gain in weekly earnings, up 3.6%, well below May and June's rates of 4.0% and 3.9%. Here again, if the downshifting in job growth persists, it will likely lead to slower nominal wage growth in coming months, as the job market becomes less tight.

As in recent months, the job's picture in July was not robust. Though some key sectors continue to add jobs, the growth rate has diminished significantly from last year. Despite very weak job growth recorded in the Household Survey, the unemployment rate has not gone up, but this is largely due to slower labor force growth, itself a sign of weaker job creation.

Most analysts expect the economy's headwinds—the ongoing housing slump, the credit crunch in financial markets, slower consumer spending—to dominate in coming months, slowing overall growth to a below-trend pace. This is likely to continue generating lukewarm reports, much like today's. Whether these trends worsen or improve will reflect the underlying strength of the economy, and that, in turn, depends upon how quickly the negative forces noted above begin to unwind.