Analysis of the Job Market - Is It Strong?

Below is some recent research completed by the American Institute of Economic Research (AIER) that discusses the strength of the job or labor market.  The article is interesting because it goes behind the numbers indicating that one metric like the unemployment rate is probably too simple to explain the complexity of the labor market.  In addition the article puts numbers to the effect that the recent winter weather can have on the job market.  This is not opinion, but some objective numbers so you can decide.  The research turned out by the AIER is always worth a look.   

Severe weather was likely an important factor in the latest employment report from the Bureau of Labor Statistics (BLS), but the good news—for a change—is that the results weren’t terribly weak.

The unemployment rate ticked up to 6.7% in February from 6.6% in January, but that wobble is probably little more than statistical noise.  The big news is that non-farm payrolls rose by a stronger-than-expected 175,000 in February.  Most people who watch these numbers were bracing for a  weaker result, owing to the impact of severe weather.

Yes, the weather in February was worse than usual… yet again. But the timing last month was especially bad: Winter Storm Pax, which crippled most of the eastern half of the country, struck during the week in which the BLS conducts its employment surveys. While you might not lose your job because you are snowed in, the BLS will not include it in the payrolls tally unless you actually did paid work during the survey week. The number of people in February who reported having a job but not going to work because of the weather during the survey week was 601,000, compared to just 237,000 in the same month last year. What if an employer planned to start a new hire on February 12 but delayed the start date to the following week because of the storm? That new job won’t count toward the monthly gain in payrolls.

Considering the toll February’s bad weather probably took—the BLS does not provide a direct measure of weather effects—the 175,000 rise in payrolls suggests the labor market continues to strengthen, despite weaker readings (also weather-affected) of 129,000 in January and  84,000 in December.

Just how weak are those numbers? If you follow the economic data in the news, you might get the sense that a jobs report is not strong unless it includes at least a 200,000 gain in payrolls.  Last year’s monthly average was 194,000, which would make it slightly-less-than strong, and certainly not impressive. This assessment no doubt contributes to the widespread skepticism that the decline in the unemployment rate, from 10% at the peak to 6.7% in February, overstates the improvement in the labor market.

But it’s worth revisiting assumptions about what constitutes a “strong” or “weak” gain in jobs. For a number of reasons—most of which have nothing to do with the strength or weakness of the economy—our labor force just isn’t growing as fast as it used to. Baby boomers are a huge demographic bulge, and as they retire and leave the workforce in droves, they are offsetting much of the gain in new entrants to the labor force, which itself is not what it used to be.

In order to keep the unemployment rate from rising, the number of new jobs in the economy must match the net growth of the workforce—the difference between the number of new entrants and the number of “leavers.” Of course, some people hold more than one job, but only about 5% of the labor force as of the latest data.

If we want to see overall unemployment decline in the economy—bringing the unemployment rate down—then payroll growth must surpass the net growth of the labor force. There’s certainly a lot of ground to make up: The economy shed over 8.6 million jobs during the recession, and since then there has been a net increase in the workforce of about 1.6 million people. So far in this recovery, the economy has created about 8 million new jobs. So we still need to see bigger gains in employment than increases in the labor force to close the unemployment gap. But what kind of numbers are we talking about?

Take a look at our chart below, which lines up labor force growth and jobs growth. The labor force numbers are erratic from month to month, so we’ve smoothed them using 12-month averages. Every time the blue area rises above the red area, the economy is creating enough jobs to bring down unemployment. Over the last year, jobs growth has exceeded labor force growth by a much wider margin, and more frequently, than it did during the early 2000s, when monthly payrolls gains would regularly surpass 200,000.

Based on the trend in labor force growth since 2012, sustained gains in payrolls in excess of 75,000 per month are enough to reduce the unemployment rate over time. That means the average gains of 194,000 per month we saw last year were quite strong—and even the lackluster 152,000 average so far this year is enough to keep chipping away at the unemployment rate. Of course, the greater the gains in jobs, the faster the unemployment rate will come down.