A sobering report from the U.S. labor market

The latest data on the U.S. labor market released today may be an aberration from the consistency of the past six months of slow but steady jobs growth or an affirmation that the long term, underlying trend of anemic growth remains the same. The U.S. Department of Labor’s Bureau of Labor Statistics announced that the U.S. economy added 142,000 jobs and that the unemployment rate dropped 0.1 percentage points to 6.1 percent. Both figures are disappointing news for a labor market that appeared to be picking up steam.

The number of jobs created fell far below expectations after strong economic data released last month increased optimism. Similarly, this month’s net job creation was well below the average job growth over the past 12 months, 212,000 jobs a month. Revisions to previous data also show that job growth in July and June was 28,000 jobs lower than we previously believed. What’s more, the unemployment rate fell mostly due to workers leaving the labor force, not because more workers found a job.

The drop in the official unemployment rate was accompanied by declines or no movement in other measures of underused workers. The so called U-6 unemployment rate, which includes unemployed workers, those marginally attached to the labor force, and those working part time for economic reasons, dropped by 0.2 percentage points in August. The number of workers employed part time for economic reasons dropped by 234,000 during this period. The labor force participation rate fell slightly, to 62.8 percent. And the share of the population with a job was unchanged at 59 percent, 3.7 percentage points below its December 2007 level.

Even a sliver of good news showed the steep climb ahead for our labor market. The employment-to-population ratio for prime-age workers, those ages 25 to 54, increased by 0.2 percentage points to 76.8 percent. But that number is still 2.9 percentage points below its December 2007 level and 4.5 percentage points below its March 2001 level.

The strength and the breadth of jobs growth also declined. The diffusion index, a measure of how many industries are adding jobs, declined to 59.1 in August from 65.9 in July. Job gains were led by professional and business services (47,000) and education and health services (37,000). Together they accounted for 63 percent of all private-sector jobs created during the month. Retail trade lost 8,400 jobs while manufacturing employment was unchanged.

Wage growth for all private-sector workers was 2.1 percent on a year-on-year basis. Wages have grown at around this rate since late 2012. The level of growth is still well below pre-recession levels of more than 3 percent.

The U.S. economy is steadily if slowly expanding but not enough to spark sustained growth in jobs and wages and a commensurate decline in unemployment. Policy makers, especially those at the Federal Reserve Board who must weigh the strength of the labor market in their monetary policy calculations, need to be supportive until more robust growth occurs. A strong foundation for long-term economic growth won’t be laid until the recovery is more broadly felt and strong wage growth returns.

September 5, 2014

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Disaggregating Growth

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