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February 3, 2006
Payroll employment growth good, but still fails to meet expectations
Nonfarm payroll employment increased by 193,000 in January, and the unemployment rate fell to 4.7 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Job gains occurred in several industries, including construction, mining, food services and drinking places, health care, and financial activities.
Most forecasts were up in the 250,000 range. Again, the actual number failed to hit the mark. Why? Is the labor market really that bad? Or are we missing something?
Here's a really simplistic prediction of job growth in the long run. Assuming that people who enter the labor market do find a job in the long run, the growth rate of population plus the growth rate of the labor force participation rate (LFPR) should equal the growth rate of employment. It is a biased predictor because the best measure of job growth (the payroll survey) uses different data than the CPS which measures LFPR. The CPS counts more people as employed than the payroll data picks up. But if that bias is fairly stable, it won't affect our growth rate prediction that much.
So here it is, the simplistic prediction versus actual payroll growth.
For being so simple, it picks up the movement fairly well. Looks like a smoothed version of the series, which it should. The fast growth in the '80s and even in the '90s is due in part to population growth, which is reflected in the predicted value.
Lately, population growth has slowed, and you can see this in the simple prediction. Demographers predict population growth to continue to slow as the boomers age. Hence, the percentage change in payroll employment will slow unless LFPR continues to rise. Whether it is reasonable to expect LFPR to rise is another question. To say "opinions differ" is an understatement. The fact is that at this point, we don't know. I think all that it is safe to say is that LFPR can't continue to rise in the way that it did up through the mid 1990s. But suppose that we are currently right at the approximate long run LFPR--that for the next 50 years it will fluctuate above and below its current level. If that is the case, the growth rate of payroll employment will slow to less than 1% per year on average. As the chart above shows, years with job growth of 3% seem to be over. Years with job growth of 2% will become fewer.
Remember, this is a very simple prediction that is not meant for forecasting month-to-month changes, but long run trends. It's a reason to be skeptical of predictions of huge job growth over the next decade, for sure. On the LFPR (and the employment/population ratio), I've been reserving judgement. More on that later. But it's not just LFPR, population growth (which is harder to do anything about) is a big part of the story too.
Posted by William Polley at February 3, 2006 3:30 PM
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The latest employment data are quite encouraging, though some may have overstated the case for enthusiasm.
[Read More]Tracked on February 4, 2006 5:17 PM
Comments
The employment-population ratio has crawled back to 62.9% (not quite as exciting as hitting 63%) but I bet the White House et al. will be screaming about that 4.7% unemployment rate. As you put it so well - what level of the labor force participation rate would we considered to be normal? Maybe 67% is a tad too high but 66% is a tad too low in my view.
Posted by: pgl at February 3, 2006 4:57 PM
The growth in hours worked has been virtually constant over the past years-- including the last 3 months . So if the economy is slowing it would mean that productivity is also slowing. On the other hand the 1% fourth Q GDP and productivity reports could just be Katrina and we are now back to the same basic trends we were before the storm. But labor markets are tighteing and average hourly earnings are rising rapidly and this implies the Fed will have to keep raising rates. That is why the market sold off on the report.
Posted by: spencer at February 3, 2006 7:50 PM
While population growth will be slow, the mass of boomer retirement lies just ahead, and this will boost not employment, but opportunity.
Posted by: Lord at February 4, 2006 12:27 PM