Words such as "grim" and "dismal" were used to describe Friday's employment report, which featured a payroll employment growth estimate for September of 142,000. Indeed, I think it would be typical, among people who watch the employment numbers, to think of performance in the neighborhood of 200,000 added jobs in a month as normal.
But what should we think is normal? As a matter of arithmetic, employment growth has to come from a reduction in the number of unemployed, an increase in the labor force, or some combination of the two. In turn, an increase in the labor force has to come from an increase in the labor force participation rate, an increase in the working-age population, or some combination of the two. So, if we want to think about where employment growth is coming from, labor force participation is an important piece of the puzzle. This chart shows the aggregate labor force participation rate, and participation rates for men and women:
Next, we'll go back to the 1980s, as that period featured a major recession, but with a very different backdrop of labor force behavior.
Fast forward to the recent data.
What most people seem to view as "normal" payroll employment growth, 200,000 per month, amounts to a 1.7% growth rate per annum, given the current level of employment. To sustain that into the future, given 0.5% population growth, requires further sustained decreases in unemployment and/or an increase in the participation rate. Are there enough unemployed people out there to generate that level of employment growth? In this post, I showed unemployment rates by duration, indicating that unemployment rates for the short and medium-term unemployed have returned to pre-recession levels or lower. What remains elevated is the number of long-term unemployed - those unemployed 27 weeks or more. Here's an interesting chart:
So, suppose that about 1 million (roughly the difference between the net increase in long-term unemployment from the beginning of the recession until now) long-term unemployed leave the labor force. This would imply an unemployment rate of about 4.6%. Can unemployment go much lower than 4.6%? Probably not. This means that there is little employment growth left to be squeezed out of the current unemployment pool. So, if payroll employment growth is to be sustained at 200,000 per month, this will require an increase in the labor force participation rate. Could that happen? This next chart shows the flows into the not-in-the-labor-force (NILF) state:
These charts reinforce a view that the fall in labor force participation, post-recession, has been driven by long-run factors, and those factors show no sign of abating. Thus, we should not expect the labor force participation rate to stop falling any time soon, nor should we expect it to change course soon.
Conclusion? With the population aged 15-64 growing at 0.5% per year, if we're getting payroll employment growth of more than about 60,000 per month (that's 0.5% growth in payroll employment per year), this has to be coming from the pool of unemployed people, or from those not in the labor force. But further significant flows of workers from unemployment to employment are unlikely, and the net flows from the labor force to NILF are likely to continue. Thus, employment growth of 142,000 may seem grim and dismal, but labor market arithmetic tells us that employment growth is likely to go lower in the immediate future.