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Discouraging Report Card on the Job Market

Both the employer and household surveys offer discouraging pictures of the job market recovery. Private sector job gains have not disappeared, but they are faltering. For the second month in a row private firms managed to generate only modest employment growth, far too small to put a dent in the nation’s massive jobs deficit. Overall payroll employment fell, though this was mainly because of an anticipated swing in federal employment connected to the 2010 census.

Payroll growth is sputtering almost everywhere in the private sector. The construction industry, which experienced enormous employment losses earlier in the recession, continues to struggle. Since the start of the recession in December 2007, employment in the construction industry has shrunk by about a quarter. Since the start of this year, payroll employment in that industry has fallen more than 100,000, slipping an additional 22,000 in June.

Recession-driven job losses in manufacturing were less severe than those in construction, but they were large by historical standards. Between the start of the recession and the low point of manufacturing employment last December, manufacturing payrolls shrank almost 2.2 million, or 16%. Job growth in 2010 has offset only a tiny fraction of these losses. Since December 2009 manufacturing payrolls have increased 136,000, with an additional 9,000 gain in June. U.S. manufacturing has a long way to go before it returns to robust health.

Employment in the government sector was comparatively healthy during most of the recession, but even here there are reasons for concern. Since the start of the year employment has slipped in both state and local governments. With federal fiscal relief to states winding down during the next year, many states and localities face a dire fiscal outlook. Forced to balance their budgets, many will trim their payrolls further when federal stimulus dollars come to an end.

Earlier this year, the household survey showed a brighter picture of the job market than the one we saw in the employer survey. In the four months through April, employment growth in the household survey averaged 416,000 per month. The picture has been darker in the past two months. Respondents to the household survey reported employment losses in both May and June, with June’s employment drop topping 300,000. To be sure, the unemployment rate edged down 0.2 percentage points last month, but this was solely due to a sizeable decline in the workforce (-652,000). The nation’s labor force participation rate fell 0.3 percentage points, erasing most of the year’s gains through April. Potential job seekers are evidently discouraged by their prospects of finding a job, and some are withdrawing from active search.

An alternative explanation for the drop in labor force participation is the lack of funding for extended unemployment benefits. This has reduced the number of unemployment compensation claimants who must search for work as a condition for receiving benefits. If a jobless person does not take active steps to look for work, he or she is not counted among the unemployed. When jobless workers run out of unemployment benefits, many of them stop visiting employment offices or checking newspapers for help-wanted ads. Because extended unemployment benefits were not funded for workers exhausting benefits in June, some workers who lost benefits may have stopped looking for work. Whatever the explanation for the shrinking size of the workforce, it is not an encouraging sign for the summer job market.