The labor market is doing better, but not fully recovered

Six-and-a-half years after the start of the Great Recession, in some ways, the U.S. labor market has recovered nicely. According to today’s Bureau of Labor Statistics Employment Situation report, the total number of workers with jobs has exceeded its pre-recession high of 138,365,000. The three-month average for job growth is 234,000 a month, a respectable level that’s higher than the average monthly rate during 2001-to-2007 business cycle. And the unemployment rate has dropped from its high of 10 percent in October 2009 to 6.3 percent in May.

But, to keep with the medical analogy, the patient still isn’t close to optimal health and remains weak. These improvements are not insignificant, but they are not enough to alleviate the pain the Great Recession inflicted on our economy.

Consider this chart from Bill McBride of Calculated Risk showing this employment recovery has been the slowest of any recovery since the end of World War II:

Then consider the employment-to-population ratio. The share of Americans over the age of 16 with a job remained at 58.9 percent in May. That’s almost 4 percentage points lower than the ratio in December 2007. And the ratio has only increased by 0.7 percentage points since its low in November 2010. That’s not a recovery.

The labor force participation rate, or the percentage of workers who have a job or are actively looking for one, was 62.8 percent in May. That rate is 3.2 percentage points lower than its pre-recession level in December 2007. And the rate has yet to start an upward climb. Some of this decline is due to the retirement of baby boomers, but it’s mostly due to workers simply giving up on finding a job.

And wage growth has been muted during the recovery as well. The year-on-year growth in nominal wages was 2.1 percent in May, just above its average rate of 2 percent since March 2010. The rate is not only below its pre-recession pace of roughly 3 percent, but it hasn’t accelerated recently either.

Settling into this new normal would affect not only the life prospects of the unemployed and the underemployed but also the future output of our entire economy. By letting workers sit idle, we risk the possibility of forever losing them and their economic potential. Economists refer to this process as hysteresis. The Congressional Budget Office has already revised down its projection of potential economic growth due to the weak recovery.

Boosting growth and getting the labor market back on track would help avoid this less equitable and poor future. On so many fronts, policy can be done to boost growth in the short term. Congress needs to seriously consider expansionary fiscal policy given today’s low interest rates and the high need of improving infrastructure. The Federal Reserve should consider if it really is time to start pulling back from quantitative easing.

Policy makers should not, and cannot, take today’s jobs report as a sign that our economy is on the right path. Too much work is left to be done.