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US Labour Market – not yet at full employment despite low unemployment

On January 10, 2020, the US Bureau of Labor Statistics (BLS) released their latest labour market data – Employment Situation Summary – January 2019 – which reveals a labour market that that is still adding jobs, albeit at a slower rate than it was last year. The December performance showed that this moderation has not yet impacted on the unemployment rate – meaning that the employment growth is keeping pace with the underlying population growth with participation steady as indicated by the steady employment-population ratio. The Broad labour underutilisation ratio (U-6) remains high (but fell in December by 0.2 points) and the official unemployment is now hovering around levels not seen since the late 1960s. The U-6 indicator fell because underemployed workers are finding low-wage jobs in the service sector. Wages growth fell below the 3 per cent level for the first time since mid-2018 and real wages growth failed to match annual productivity growth. The worry is that the jobs being added represent a significant hollowing out of jobs in the median wage area (the so-called ‘middle-class’ jobs), which is reinforcing the polarisation in the income distribution and rising inequality. There is no hint, yet in the data, that a recession is coming any time soon or that that US labour market is at full employment despite the low unemployment rate.

Overview for December 2019

  • Payroll employment rose by 145,000 – well below the 2019 monthly average.
  • Total labour force survey employment rose by 267 thousand net (0.17 per cent).
  • The seasonally adjusted labour force rose by 209 thousand (0.13 per cent).
  • Official unemployment fell by 58 thousand to 5,753 thousand.
  • The official unemployment rate remained largely unchanged at 3.50 per cent (-0.04 points).
  • The participation rate was steady at 63.2 per cent but remains well below the peak in December 2006 (66.4 per cent). Adjusting for age effects, the rise in those who have given up looking for work for one reason or another since December 2006 is around 2,188.5 thousand workers. The corresponding unemployment rate would be 4.76 per cent, far higher than the current official rate.
  • The broad labour underutilisation measure (U6) fell by 0.2 points to 6.7 per cent largely because of a decline in the number in the part-time for economic reasons cohort (the US indicator of underemployment).

For those who are confused about the difference between the payroll (establishment) data and the household survey data you should read this blog post – US labour market is in a deplorable state – where I explain the differences in detail.

Overall comments

1. The payroll figures were weaker. But, they should be seen in the context of last month’s stronger results. Thus there is some volatility in the US labour market.

2. Overall, given what is happening in the global context (trade war, etc), the US labour market is maintaining growth.

3. But, the composition of employment is shifting – there were job losses in the high-wage sectors (Mining and Manufacturing), which were more than offset by the gains in the service sector – biasing the overall result to low-wage, precarious jobs.

4. The indicators of labour underutilisation are heading downwards, but, as we have noted often, this doesn’t tell us about job quality or better earnings outcomes.

5. The decline in underemployment came from the growth in the service sector mopping up workers who were part-time for economic reasons, rather than choice.

6. Annual average earnings rose by only 2.9 per cent (down from 3.1 per cent), which is the first time it has fallen below 3 per cent since July 2018.

7. Overall, the indicators are not giving us a very good signal of where the labour market is at.

Payroll employment trends

The BLS noted that:

Total nonfarm payroll employment increased by 145,000 in December. Notable job gains occurred in retail trade and health care, while mining lost jobs. In 2019, payroll employment rose by 2.1 million, down from a gain of 2.7 million in 2018.

The first graph shows the monthly change in payroll employment (in thousands, expressed as a 3-month moving average to take out the monthly noise). The gray lines are the annual averages.

This month saw the change in payroll employment rise well above the average monthly change for the year to date.

The next graph shows the same data in a different way – in this case the graph shows the average net monthly change in payroll employment (actual) for the calendar years from 2005 to 2019 (the 2019 average being for the first 11 months at this stage).

The red diamond is the current month’s increase.

The slowdown that began in 2015 continued through 2017 was reversed last year. The 2018 average was 223 thousand compared to 179 thousand in 2017.

The final average for 2019 was 176 thousand.

The December result is weaker in a year of weaker job additions.

To put the current recovery into historical perspective the following graph shows the average annual growth in payroll employment since 1960 (blue columns) with the decade averages shown by the red line.

It reinforces the view that while payroll employment growth has been steady since the crisis ended, it is still well down on previous decades of growth.

Labour Force Survey – employment growth remains positive

Employment as measured by the household survey rose by 267 thousand net (0.175 per cent) while the labour force rose by 209 thousand (0.13 per cent).

As a result (in accounting terms), total unemployment fell by 58 thousand and the unemployment rate remained largely unchanged at 3.5 per cent (-0.04 point). The last time the unemployment rate was this low was in August 1969.

The next graph shows the monthly employment growth since January 2008. The red line is the average labour force growth over the period December 2001 to December 2006 (0.09 per cent per month).

Summary conclusion:

1. There is still no coherent positive and reinforcing trend in employment growth since the recovery began back in 2009. There are still many months where employment growth, while positive, remains relatively weak when compared to the average labour force growth prior to the crisis or is negative.

There are also months where employment growth is negative.

2. Contrary to the message from the payroll data, the labour force survey data is showing a slightly stronger situation.

A good measure of the strength of the labour market is the Employment-Population ratio given that the movements are relatively unambiguous because the denominator population is not particularly sensitive to the cycle (unlike the labour force).

The following graph shows the US Employment-Population from January 1948 to December 2019. While the ratio fluctuates a little, the December 2019 ratio was unchanged at 61 per cent and held that level since September 2019.

Over the longer period though, we see that the ratio remains well down on pre-GFC levels (peak 63.4 per cent in December 2006), which is a further indication of how weak the recovery has been so far and the distance that the US labour market is from being at full capacity (assuming that the December 2006 level was closer to that state).

It is usually a positive sign though when total employment outstrips or keeps up with the underlying growth in the working age population.

Unemployment and underutilisation trends

The first graph shows the official unemployment rate since January 1950 which is currently at 3.5 per cent, slightly lower than the previous month.

It is clear that the US labour market is reaching unemployment rates not seen since the late 1960s.

With inflation stable, the continued low unemployment rates make a mockery of official NAIRU estimates of full employment coinciding with an unemployment rate of 4.6 per cent.

The official unemployment rate is a narrow measure of labour wastage, which means that a strict comparison with the 1960s, for example, in terms of how tight the labour market, has to take into account broader measures of labour underutilisation.

The next graph shows the BLS measure U6, which is defined as:

Total unemployed, plus all marginally attached workers plus total employed part time for economic reasons, as a percent of all civilian labor force plus all marginally attached workers.

It is thus the broadest quantitative measure of labour underutilisation that the BLS publish.

In December 2006, before the effects of the slowdown started to impact upon the labour market, the measure was estimated to be 7.9 per cent.

In December 2019 the U6 measure fell by 0.2 points to 6.7 per cent. This was the result of the category ‘Part-time for economic reasons’ – a measure of underemployment in the US data context) falling by 140 thousand or 3.3 per cent.

U-6 was 8.0 per cent at the beginning of 2019.

The U-6 measure is now below the pre-GFC level, and, while, signalling improvement, there is still some scope to go before full capacity is reached.

Feature this month: Wage movements

One of the ways of assessing whether the US economy is close to full employment is to examine the growth in wages, which tells us whether the supply-side of the labour market (workers) is enjoying gains in bargaining power.

The other indicator is the rate at which workers are quitting their jobs, which provides a signal of mobility and confidence among workers. The most recent data is not yet available.

The BLS reported that:

In December, average hourly earnings for all employees on private nonfarm payrolls rose by 3 cents to $28.32. Over the last 12 months, average hourly earnings have increased by 2.9 percent. In December, average hourly earnings of private-sector production and nonsupervisory employees, at $23.79, were little changed (+2 cents).

The following graph shows the annual hourly earnings growth for all private employees since March 2007.

The recent trend is downwards and dispels any notion that the US has reached the end of their expansionary capacity.

Noting that the above graph is in nominal terms – the BLS Real Earnings Summary – tells us that:

Real average hourly earnings for all employees were unchanged from October to November, seasonally adjusted … This result stems from an increase of 0.2
percent in average hourly earnings combined with an increase of 0.3 percent in the Consumer Price Index for All Urban Consumers (CPI-U) …

Real average hourly earnings increased 1.1 percent, seasonally adjusted, from November 2018 to November 2019.

And, from the – BLS Productivity and Costs, Third Quarter 2019, Revised – report we find that:

From the third quarter of 2018 to the third quarter of 2019, productivity increased 1.5 percent, reflecting a 2.3-percent increase in output and a 0.9-percent increase in hours worked.

So real hourly earnings growth lagged behind the annual productivity growth by 0.4 percentage points, which is another sign of labour market slack and weak bargaining power.

The following graph shows movements in real average hourly earnings (indexed at 100 the pre-GFC peak – November 2006) up to November 2019.

The faster growth as the recovery gained speed ended in early 2016. A more recent growth spurt is observed over the first half of 2017.

But that has now given way to declining growth in real wages.

The real hourly index has been static in the last several months of 2019.

Conclusion

The December 2019 US BLS labour market data release tells me that the US labour market remains below the performance achieved in 2018 although there has been considerable month-to-month volatility.

The US labour market is still adding jobs albeit at a slower pace than in 2018, and the December performance showed moderation compared to the rather sharp improvement in quantitative terms revealed by the November release.

The Broad labour underutilisation ratio (U-6) fell by 0.2 points but remains high and the official unemployment is now hovering around levels not seen since the late 1960s

The worry is that the jobs being added represent a significant hollowing out of jobs in the median wage area (the so-called ‘middle-class’ jobs), which is reinforcing the polarisation in the income distribution and rising inequality.

Further, wages growth fell below the 3 per cent level for the first time since mid-2018 and real wages growth failed to match annual productivity growth.

Taken together, we can conclude that the US labour market is not yet at full employment despite the low unemployment rate.

That is enough for today!

(c) Copyright 2019 William Mitchell. All Rights Reserved.

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    This Post Has 18 Comments
    1. Bill you say here-“The U-6 indicator fell because underemployed workers are finding low-wage jobs in the service sector. Wages growth fell below the 3 per cent level for the first time since mid-2018 and real wages growth failed to match annual productivity growth. The worry is that the jobs being added represent a significant hollowing out of jobs in the median wage area (the so-called ‘middle-class’ jobs), which is reinforcing the polarisation in the income distribution and rising inequality.”

      And I think you are exactly right. From here and from my point of view about what is happening in my country.

      The thing is- I have never been able to square this kind of statement about workers mostly only finding low wage jobs in the service sector with the imports are always a real benefit, exports a real cost argument that MMT makes along with most economists (I know you added some nuances and I appreciate that). And I don’t think I ever even heard of an economist that was more concerned about the unemployed or underemployed than you. I guess my question is – how do we avoid this “hollowing out” of jobs? I think it is a pretty serious question.

    2. Re – Jerry Brown
      Monday, January 13, 2020 at 14:57

      The hollowing out of jobs has been going on for some considerable time.

      It could be argued that with greater trade union power this would not have occurred. However, where higher productive occupations shift to other areas of the globe it is difficult to avoid a relative diminution in former industrial powerhouses – again trade union power could have constrained the result of this change, but that may only have created further employment disruption; mitigated perhaps by greater sovereign self-sufficiency and a job guarantee system – but that would not guarantee maintenance of living standards in the face of international productivity rivalry.

      Any argument based on a desire by “The Elite” element of society to limit worker power misses the point.

    3. I appreciate your response Gogs. I would argue that greater labor union power might slow that down- but it wouldn’t and couldn’t stop it if the government let it go forward. I’m just having a problem where I can’t see what to do about it. This ‘hollowing out’ of jobs has gone on for a long, long time in the US at least. And it sucks, in my opinion. What to do about it? I know it is not an easy question.

    4. Dear Jerry,

      The perennial problem you refer to – and what to do about it represents much of what the UK Labour party is about. But its protagonists can’t come up with the complete solution because what it is fighting against is the natural human instinct to compete; this automatically breeds winners and losers.

      The inequality that is a natural consequence of human (hence, industrial) contest has been tackled predominantly by re-distribution of income; taxation, tariffs and the like – not to mention MMT’s JG.

      However solving the root cause would require an economic world that seems light years away from Capitalism. In the meantime we are edging ever minutely closer to that fairer goal, but we will not see it in our lifetime, short of universal upheaval and its accompanying conflicts.

      And remember, competition is closely associated with human prosperity.

    5. Jerry Brown writes:
      ” I have never been able to square this kind of statement about workers mostly only finding low wage jobs in the service sector with the imports are always a real benefit, exports a real cost argument that MMT makes”

      Yes, especially in the light of this:

      “”One-quarter of American workers make less than $10 per hour. That creates an income below the federal poverty level. These are the people who wait on you every day. They include cashiers, fast food workers, and nurse’s aides.”

      So minimum wage needs to rise to $15 per hr. for everyone of working age, but the private sector can’t pay it.

      And in Australia, we will need to replace coal mines with *subsidized* well paid manufacturing of solar panels and wind turbines; I suspect an international central bank able to create reserve accounts in the currencies of c. 180 nations will be required.

      Gogs writes:
      ” competition is closely associated with human prosperity’
      ….and the destroyer of human prosperity, war.

      Anyone for an international rules based system?

    6. Gogs responds to Jerry: “And remember, competition is closely associated with human prosperity.” I would argue that cooperation is much more closely associated with human prosperity. Pushed too far, competition divides society and hinders progress by pitting each individual against all others in a winner-take-all frenzy of self interest and self assertion. Only when people work together, each contributing what they can, does prosperity emerge in a socioeconomic system. Indeed, one might consider economics to be the human version of ecology, where each species has a unique role to play in maintaining the health of the ecosystem. Competition between species and between individuals of the same species is certainly a part of healthy ecological functioning, but it pales in significance when compared to the cooperation, the synergy, of the parts working together to sustain and strengthen the whole. Might not neoliberalism at least partially be defined as the blind and obsessive overvaluing of competition, which inevitably creates a dismal, dysfunctional world of winners (the few) and losers (the many)?

    7. Newton, could not agree more. Some competition might be helpful but not the unbridled kind heralded by neoliberalism. It could be argued that competition is now out of control, fueling hubristic and malignant narcissistic behavior even to the detriment of its own proponents. Really ugly.

    8. Another term for “(unrestricted) competition” would be Hobbes’s “war of all against all”. I hardly think that that dystopia is associated with human prosperity in general, but only to that of those few who come out on top.

      Surely, it’s not unrestricted but only *restricted* competition which is, or may be, “closely associated with human prosperity”. To believe otherwise is to be at one with the libertarians and other assorted crazies.

    9. I regard most followers of MMT as belonging to a branch of humanity that has recognised the limitations of economic competition.

      But it is a far stretch of imagination to assume that the wonderful logic of MMT will transform society by a straightforward implementation of its principles – otherwise it would have been done already.

      The major task remains convincing humanity that it stands to gain appreciably by changing the way economic life operates. MMT is only the beginning of that process, and arguably the easiest. But fear not, co-operation is already spreading its tentacles – the increasingly combined forces of primary and social care within the humanitarian reach of the NHS is one splendid example.

    10. @ Jerry Brown
      “This ‘hollowing out’ of jobs has gone on for a long, long time in the US at least. And it sucks, in my opinion. What to do about it? I know it is not an easy question”.

      And not one to which I for one can proffer any easy answers, not least because I don’t believe there are any. The class which is perceived to be primarily subject to being “hollowed out” is the middle class (including the upper strata of blue-collar workers). But what law of nature is there according to which the relatively advantageous position they attained throughout the “golden years” from the mid-‘forties to the late-‘seventies can or ought to be preserved? Can such things be legislated-for at all? I doubt it.

      That society was the product of the particular conjunction of economic, social and technological forces during that era, the postwar period – especially in the USA. (I’m not sure their counterparts this side of the Atlantic were as favoured).

      Now, times are very different indeed – and not solely due to neoliberalism’s ascendancy either: that’s too simplistic.

      Besides, I suspect that the unintended consequences of social engineering were any to be attempted would almost certainly create fresh problems, and probably worse ones. Social engineering usually does.

    11. Tom is on the money, echoing Bill’s long-advocated prescription for restoring socioeconomic health. The JG is merely the beginning, putting buffer stock employees to work in productive ways and simultaneously setting a ground floor for employment in general. Then comes the hard stuff: using fiat money not to fight wars or bail out banks but to employ ALL the personnel necessary to address the existential crises in human and planetary health. For those of us on the left, the genuine as opposed to the corporate left, the lens of MMT offers a glimpse of precisely this kind of resplendent future, IF (a huge “if”) we can get its axioms across to the public and summon the political will to use what has been learned.

    12. “Reclaim the state and create jobs outside of the market.”

      Yup. It is pretty obvious after 40 years that ‘the market’ isn’t going to fix it for us. I think it is a political problem. It is a problem of the bottom of the working class not having any representatives or bargaining power or alternatives. Create jobs outside of the market. That gives an alternative and allows bargaining to even begin. Maybe that would filter upwards. Its got to be better than what trickles downwards.

    13. ‘Besides, I suspect that the unintended consequences of social engineering were any to be attempted would almost certainly create fresh problems, and probably worse ones. Social engineering usually does.’

      Robert H- aren’t all cultures a form of social engineering? Unless one believes in a ‘Pleistocene’ or original state of humanity prior to the development of culture. The question is then which sort of social engineering we ( very loaded ‘we’)! consider to be the most beneficial and there are different ideologies up for grabs.

      Some religions (I’m thinking of the Quakers now) thought that once humans relinquish their own power drives there is an underlying spiritual force that allows people to communicate in the most effective and ‘truthful’ way allowing for greater consensus. The 18th Century American Quaker, John Woolman, was of this mind and was an early (1750’s) critic of slavery and an early recogniser of the rights of the indigenous populations holding meetings with local Indian communities.

      So I guess I see economics more as a spiritual/psychological issue about our view of human relationships and the relinquishing of personal power and control to allow something else to enter but that would require immense rationality and self awareness and probably unlikely given that we live in a culture, as Elias Canetti put it, ‘choking on power.’

    14. Oh and training yourself as an absolute badass at economics helps a lot.

      Like being able to shut people down and give people hope helps tremendously.

      MMT lets you command the conversation.

    15. @ Simon Cohen
      “Robert H- aren’t all cultures a form of social engineering?”

      In my opinion:- most decidedly not!

      Culture is evolutionary *by definition*, not prescriptive. Social engineering (eg the creation by means of revolution of the intended workers’ paradise the Soviet Union) is the – by definition prescriptive – polar opposite of that.

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