In October 2015, after a September payroll employment estimate of 142,000 new jobs, described as "grim" and "dismal" in the media, I wrote this blog post, arguing that we might well see less employment growth in the future. That conclusion came from simple labor force arithmetic. With the working-age population (ages 15-64) growing at a low rate of about 0.5%, if the labor force participation rate failed to increase and the unemployment rate stopped falling, payroll employment could grow at most by 60,000 per month, as I saw it last October.
After the last employment report, which included an estimate of a monthly increase of 38,000 in payroll employment, some people were "shocked," apparently. Let's take a look at a wider array of labor market data, and see whether they should be panicking.
If you have been following employment reports in the United States for a while, you might wonder why the establishment survey numbers are always reported in terms of the monthly change in seasonally-adjusted employment. After all, we typically like to report inflation as year-over-year percentage changes in the price level, or real GDP as quarterly percentage changes in a number that has been converted to an annual rate. So, suppose we look at year-over-year percentage changes in payroll employment:
What's happening with unemployment and vacancies?
If we break down the unemployment rate by duration of unemployment, we get more information:
Some people have looked at the low employment/population ratio and falling participation rate, and argued that this reflects a persistent inefficiency:
Another key piece of labor market information comes from the CPS measures of flows among the three labor force states - employed (E), unemployed (U), and not in the labor force (N). We'll plot these as percentage rates, relative to the stock of people in the source state. For the E state:
The last thing we should look at is productivity. In this context, a useful measure is the ratio of real GDP to payroll employment, which looks like this: Chad Syverson, for example, argues that there is no evidence of bias in measures of output per hour worked. So, if we take the productivity growth measures at face value, this is indeed something to be shocked and concerned about.
1. The recent month's slowdown in payroll employment growth should not be taken as a sign of an upcoming recession. The labor market, by conventional measures, is very tight.
2. The best forecast seems to be that, barring some unanticipated aggregate shock, labor force participation will stay where it is for the next year, while the unemployment rate could move lower, to the 4.2%-4.5% range, given that the fraction of long-term unemployed in the unemployment pool is still relatively high.
3. Given an annual growth rate of about 0.5% in the working age population, and supposing a drop of 0.2-0.5 percentage points in the unemployment rate over the next year, with half the reduction in unemployment involving transitions to employment, payroll employment can only grow at about 80,000 per month over the next year, assuming a stable labor force participation rate. Thus, if we add the striking Verizon workers (about 35,000) to the current increase in payroll employment, that's about what we'll be seeing for the next year. Don't be shocked and concerned. It is what it is.
4. Given recent productivity growth, and the prospects for employment growth, output growth is going to be low. I'll say 1.0%-2.0%. And that's if nothing extraordinary happens.
5. Though we can expect poor performance - low output and employment growth - relative to post-WWII time series for the United States, there is nothing currently in sight that represents an inefficiency that monetary policy could correct. That is, we should expect the labor market to remain tight, by conventional measures.