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Patrick J. O'Keefe Discusses November 2016 Jobs Report


On Friday, December 2, the Bureau of Labor Statistics (BLS) will release data summarizing national labor market conditions during the month of November. 

Patrick O’Keefe, Director of Economic Research at CohnReznick, former Deputy Assistant Secretary of the U.S. Department of Labor, and a former Deputy Director of the National Commission for Employment Policy, expects the BLS to report that:

 
  • The economy added 141,000 jobs in November;
  • Private sector gains – largely concentrated in healthcare, leisure/hospitality, and temporary help – accounted for all of the monthly gain; 
  • Private sector earnings rose for the eleventh consecutive month; and,
  • Key measures of human resource utilization (viz., labor force participation, jobholders, and unemployment) were little changed in November.
 
Despite another month in which the jobs count continued to increase, we expect the BLS to report that, through November, 2016's year-to-date employment gains have been the weakest of any year since 2012.
 
And while the key indicators of human resource utilization hover near their best post-recession readings, much of the improvement reflects the secular decline in labor force attachment, which has only recently – and modestly at that – begun to recover.
 
BLS is expected to report that November's unemployment rate was unchanged at 4.9%, in close proximity to the Federal Reserve's target for the 15th 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, a 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.  
 
Policymakers, including those at the Federal Reserve, are necessarily data dependent.  But are their data dependable?  Are policymakers relying on yesterday's measures to assess today's conditions?
 
Given the significant shifts in labor force participation, does the current array of indicators (most particularly, the conventional unemployment rate) adequately describe contemporary conditions?
 
The accompanying chartbook displays U.S. labor market data through October.
 
Background – Employment [Charts 1 - 29]
 
In October, the U.S. economy provided a record 145 million jobs; 6.5 million (4.7%) more than at the start of the recession 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). [In 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.  Post-census, nonfarm employment has increased for 73 consecutive months and added 14.6 million jobs.] Private sector payrolls fell by 8.8 million jobs (7.6% of the pre-recession peak).
 
From the start of the jobs recovery in March 2010 through September of this year, private employment increased – in 79 of 80 months [In May 2016, private sector employment declined by 1,000 jobs (-0.0008%).] – by 15.5 million jobs, 75.9% more than the total losses incurred during the downturn.
 
Over the course of the most recent cycle:
 
  • Private service providers added 13.5 million jobs, almost nine-tenths (87.1%) of the private sector's gains and substantially more than the service sector's share (67.2%) of total employment during the five years (2003 - 2007) prior to the recession;
  • Goods producers regained less than one-half (46.0%) of the 4.3 million jobs lost during the contraction; and,
  • Public sector employment (16.3% of pre-recession jobs) – after a longer climb to its cyclic peak (May 2010) and a slower fall to its cyclic bottom (January 2014) – remains 761,000 jobs (3.3%) below its cyclic peak, which was its historic high.
 
On Friday, BLS is expected to report that total nonfarm employment rose by 141,000 jobs in November, with all of the gain occurring in the private sector.
 
Average hourly earnings are estimated to have increased by 9 cents (+ 0.3%) in November, yielding a year-on-year increase of 2.9%.
 
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 slowly downward – sporadically reaching and bouncing off a low point of 65.8%.  
 
Although the LFPR's decline persisted through the recession and into the recovery, it appears to have bottomed at a 38-year low (62.4%) in September 2015 and has inched upward since.  October's LFPR was 62.8%, modestly above the September 2015 nadir (62.4%). 
 
Friday's data are expected to show that the LFPR was 62.9% in November, a tick above its most recent 12 month average of 62.8%.
 
October's unemployment rate (the number of jobseekers as a percent of the labor force) was 4.9%, its average over the past year. 
 
We expect BLS to report that the unemployment rate remained at 4.9% in November.  At its recessionary peak in October 2009, the unemployment rate was 10.0%.
 
Although the unemployment rate's decline has been dramatic, its drop exaggerates the degree of the labor market's recovery.  Most of the decline from 10.0% to around 5.0% reflects shrinking labor force participation rather than expanding employment.  
 
Some of the rate's decline reflects the economy's recovery; some is due to demographic trends (e.g., retiring Boomers).  But most of the jobless rate's drop is attributable to dispirited aspirants: those who have foregone their job-search due to a perceived paucity of opportunities and others who have abandoned their job search due to their frustration rather than its fruition.
 
The decline in participation has diminished the conventional unemployment rate as a policy guide (e.g., the Federal Reserve's reliance on it as a guide in determining the course of interest rates).  
 
Were it supplemented by a participation adjusted rate of unemployment (PARU), a calculation reflecting the structural shifts in the utilization of the nation's human resources, the need for policies beyond the reach of the Federal Reserve's arsenal would be more readily apparent.  
 
Since the start of the recession, the work-age population has increased by 9.3% (21.7 million individuals).  Over that same period, the labor force has grown by only 3.7% (5.6 million), a marginal LFPR of 26.0%.  
 
As a consequence, the LFPR, which was 66.2% in January 2008, had fallen to 62.8% in October.
 
Were labor force participation equivalent to its pre-recession average (e.g., 66.1% between 2003-2007), the PARU would exceed 9.0% (versus October's 4.9%) and the count of jobseekers would approximate 16.2 million (versus the conventional estimate of 7.9 million).
 
As with any statistical indicator, there is room for debate about how a PARU should be specified.  But there is little, if any, rationale for relying on the current maladjusted measure as a key factor in formulating labor market policies.
 
By way of illustration:  October's "official" unemployment rate (4.9%) is in close proximity to the Fed's "maximum employment" goal.  
 
While the conventional measure of unemployment might seemingly justify an interest rate hike, a PARU of 9.0% would suggest that alternative – more direct – labor market interventions are in order.  
 
The employment rate (i.e., jobholders as a proportion of the work-age population), was 59.7% in October, 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 October.
 
Had the employment rate been equivalent to the pre-recession average, an additional 7.5 million Americans would have been jobholders in October.  
 
Underemployment (i.e., involuntary part-time jobholders), at 5.8 million workers, was virtually unchanged in October.  At its recessionary peak (March 2010), 9.1 million workers (6.6% of all jobholders) were underemployed.  
 
During the five years prior to the recession (2003 through 2007), an average of 3.1% of all jobholders were underemployed.  In October, 3.8% of all workers were.  
We anticipate a modest decline in November's underemployment count, with the share of jobholders slipping to 3.6%, the lowest since May 2008.
 
In October, the long-term unemployed (i.e., those whose job search exceeds 26 weeks) totaled almost 2.0 million.  That was 5.0% higher than in May, which registered the lowest reading since mid-2008.  Compared to its April 2010 recessionary peak, long-term unemployment has declined 70.9%.  Improvement has been grudging and its sluggish pace is expected to persist.   
 

 

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