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Discouraging Gains in the Job Market

In spite of the drop in the unemployment rate reported today by the BLS, the underlying message of the latest jobs report is that the labor market remains weak. For jobless workers the situation may be improving, but only very slowly. For the twelfth consecutive month private employers added to their payrolls, but at a pace that is too slow to reduce the unemployment rate noticeably. On average last year private employers added slightly more than 110,000 jobs a month. More than a fifth of the new jobs over the last year were in the temporary help services industry. Another 20% was in the health services industry, where employment growth has been steady throughout the recession and early recovery.

Employment in the public sector continues to shrink. On a seasonally adjusted basis it fell another 10,000 in December, slightly more slowly than the pace of decline earlier in the year. Job losses in recent months have been concentrated in local government payrolls. Since December 2009 local government employment has fallen 259,000, offsetting almost a fifth of the total job gains that have occurred in the private sector. The immediate outlook for state and local employment is not bright. Although state and local tax revenues are improving, federal fiscal relief will soon come to an end. State legislatures and local governments will face strong pressure to trim spending, and this is likely to mean continued slow decline in public payrolls.

The unemployment rate fell 0.4 percentage points in December, which is heartening. However, much of decline was the result in a decline in the size of the workforce. The adult labor force participation rate fell 0.2 percentage points in December, capping a year in which the participation rate fell 0.4 points. The decision of jobless workers to leave the labor force is understandable. Since late in 2009 more than 4 in 10 of the unemployed have been jobless for 6 months or longer. The number of long-term unemployed increased more than 300,000 between December 2009 and December 2010, and it has increased more than 5.1 million since the end of the last business cycle expansion in December 2007. For the U.S. job market the extent of long-term joblessness is staggering. In the post-war era up through 2009 no more than one-quarter of the unemployed in any given month had been jobless for longer than 6 months. This year about 45% have been unemployed at least that long.

The situation of American workers who've managed to hold on to their jobs has improved, however. The average work week has remained steady in the past couple of months, but it has inched up 1.5% (0.5 hours) since the end of 2009. Measured in inflation-adjusted dollars, average weekly earnings increased 2.3% between December 2009 and November 2010. Real hourly earnings increased 0.8%. The real income gains of working Americans have helped boost household consumption.

2010 was a year that saw only slight progress for the unemployed but real gains for workers with the good fortune to hang on to their jobs. To put a major dent in today's unemployment rate, the pace of the economic expansion has to rise. The growing gap between the fortunes of Americans with and without jobs is matched by the widening divide between people who work for others and the businesses that employ them. Measured in nominal dollars, corporate profits now exceed their pre-recession levels. Business profitability has returned, but total wage and salary income is still lower than it was before the recession began. The political danger facing the unemployed is that rising business profits and the improving fortunes of the employed will cause policymakers to lose sight of the problems still facing the long-term unemployed.