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Patrick J. O'Keefe Discusses September 2016 Jobs Report


On Friday, October 7th, the Bureau of Labor Statistics (BLS) will release data summarizing national labor market conditions in September.  CohnReznick expects the BLS report to show that:

  • The economy added 160,000 jobs in September;
  • Private sector gains – concentrated in the healthcare, leisure/hospitality, and temporary help industries – were augmented by increases in public sector employment.;
  • Private sector earnings rose for the ninth consecutive month; and,
  • Key measures of human resource utilization (labor force participation, jobholders, and unemployment) recorded further improvements.
 

BLS is expected to report that September's unemployment rate was unchanged at 4.9%, in close proximity to the Federal Reserve's target for the 13th consecutive month. 

But much of the unemployment rate's improvement – from 10.0% at its recessionary peak – reflects diminished labor force participation rather than increased jobholding. 

As discussed below, the participation-adjusted rate of unemployment (PARU), which takes account of reduced labor force attachment, indicates that labor market slack is substantially greater than implied by the conventional unemployment rate. 

The accompanying chartbook displays U.S. labor market data through August.

Background – Employment [Charts 1 - 29]

In August, the U.S. economy provided a record 144.6 million jobs; 6.2 million (4.5%) more than at the recession's start in January 2008.

From the onset of the contraction through its nadir in February 2010, total nonfarm employment declined by 8.7 million jobs (6.3% of the pre-recession peak)1.

Between the start of the jobs recovery in March 2010 through August of this year, private employment increased – in 77 of 78 months2  –  by 15.0 million jobs, 70.9% more than the recessionary losses.

Over that period:

  • Private service providers added 13.2 million new jobs, almost nine-tenths (87.0%) of the recovery's gains and substantially more than their pre-recession share (67.2%) of all jobs;
  • Goods producers regained less than one-half (45.7%) of the 4.3 million jobs lost during the contraction; and,
  • Public sector employment (16.3% of pre-recession jobs) was 175,000 (0.4%) below the January 2008 total.
 

On Friday, BLS is expected to report that total nonfarm employment rose by 160,000 jobs in September, with public sector employers accounting for 15,000 of the rise.

Average hourly earnings are estimated to have increased by 4 cents (+ 0.16%) in September, yielding a year-on-year increase of 2.5%.

Background – Labor Force [Charts 30 - 43]

The labor force is comprised of all non-institutionalized civilians, 16 years and older, who are either jobholders or jobseekers (i.e., sought work in the prior four weeks).

The labor force participation rate (LFPR), the share of the work-age population that has or is seeking paid employment, peaked at 67.3% early in 2000.  From then until the onset of the recession, it drifted downward – sporadically touching 65.8%. 

Although participation continued to decline during the recession and much of the recovery, it appears to have bottomed at a 38-year low (62.4%) a year ago and has inched upward since.  August's LFPR was 62.8%.

Friday's data are expected to show that the LFPR ticked up to 62.9% in September.

August's unemployment rate (the number of jobseekers as a percent of the labor force) held at 4.9% for the third consecutive month.  Except for a one-month dip this past May, that was the lowest monthly reading since November 2007. 

At its recessionary peak in October 2009, the unemployment rate was 10.0%.

We expect BLS to report that the unemployment rate in September remained at 4.9%, in close proximity to the Fed's policy target3.   As noted above, however, the diminished unemployment rate overstates the degree of recovery.  Most of the drop reflects shrinking labor force participation rather than expanding employment. 

To be clear: although some of the decline in participation is demographic (e.g., retiring Boomers), most of it is attributable to dispirited aspirants (i.e., those who have foregone their job-search due to a perceived paucity of opportunities and those who abandoned their job search due to frustration rather than fruition).  

Because of the decline in participation, the conventional unemployment rate has become an archaic policy guide that should be replaced, or at the very least, supplemented, by a participation adjusted rate of unemployment (PARU), which would provide a more realistic estimate of the utilization of the nation's human resources (i.e., the labor market's relative slack or tightness). 

Since the start of the recession, the work-age population has increased by 9.1% (21.2 million).  Over that same period, the labor force has grown by 3.5% (5.4 million), a marginal LFPR of 25.4%.

As a consequence, the LFPR, which was 66.2% in January 2008, was 62.8% in August.

Were labor force participation equivalent to its pre-recession average (e.g., 66.1% between 2003-2007), the PARU would exceed 9.0% (versus August's 4.9%) and the count of jobseekers would exceed 16.2 million (versus the conventional estimate of 7.8 million).

As with any counter-factual, there is room for debate about how the PARU should be defined.  But there is little, if any, rationale for making policy decisions – monetary or fiscal – based on the current maladjusted indicator.

As discussed above, August's "official" unemployment rate (4.9%) is in close proximity to the Fed's "maximum employment" goal.  While that would seemingly justify an interest rate hike, any reasonably calculated PARU would indicate otherwise.

The employment rate (i.e., jobholders as a proportion of the work-age population), was 59.7% in August, well below its 63.0% pre-recession average (2003-2007).

We look for BLS to report that the employment rate rose to 59.8% in September.

Had the employment rate been equivalent to the pre-recession average, an additional 8.2 million Americans would have been jobholders in August.

Underemployment (i.e., involuntary part-time workers) rose modestly (1.5%) in August.

At its recessionary peak in March 2010, 9 million workers (6.6% of all jobholders) were underemployed.  In August, 3.9% of all jobholders were underemployed. 

We anticipate a modest decline in September's underemployment count, with the share of jobholders falling to 3.7%, which would be the lowest since mid-2008.

Long-term unemployment (spells exceeding 26 weeks) in August totaled 2.0 million, 6.4% higher than in May, which registered the lowest reading since mid-2008.  Compared to its April 2010 recessionary peak, long-term unemployment has declined 70.3%.   Little, if any, improvement is expected in September's data.


1In 2010, the underlying trend in total nonfarm employment (i.e., the sum of private and public jobs) was temporarily obscured by temporary Federal jobs (564,000 at the peak) to conduct the decennial census.  Since then, nonfarm employment has increased for 67 consecutive months and added 14.2 million jobs.

2In May, 2016, private sector employment declined by 1,000 jobs (-0.0008%).

3The Federal Reserve Act directs the Fed to promote three goals: maximum employment, stable prices, and moderate long-term interest rates.  It actively pursues its employment goal (i.e., an unemployment rate of approximately 5.0 percent) and prices goal (i.e., inflation of about 2.0 percent), but treats its third mandate (interest rates) like a red-headed stepchild.

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