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The Unemployment Rate Is Edging Down, and the Job Picture Slowly Improving

Recruiters speak with job-seekers at a career fair, part of the annual National Urban League Conference, in Philadelphia July 25, 2013

Moderate employment gains continued in July, and the unemployment rate edged down.  The BLS employer survey showed payrolls grew 162,000 in July, with all the gains occurring in the private sector.  Government employment continues to be a source of job market weakness.  Revisions in payroll estimates for May and June subtracted a total of 26,000 from estimated job growth in those two months. Nonetheless, the 3-month average of payroll gains remained slightly above 175,000 per month.  Employment gains of between 75,000 and 80,000 a month are needed to keep the unemployment rate from rising.  So far this year the BLS employer survey shows that payrolls have been rising about 190,000 a month, fast enough so that we should expect the unemployment rate to fall.

The unemployment rate is estimated based on the BLS household survey, which shows a somewhat slower rate of employment growth since the end of last year.  The number of adults who report holding a job has increased an average of 140,000 a month since last December. This is a fast enough rate of improvement to push down the unemployment rate.  Indeed, the jobless rate has fallen 0.4 percentage points since the end of last year. Reported employment gains in the household survey have been faster in recent months.  In July, for example, employment gains totaled 227,000, helping push down the unemployment rate 0.2 points to 7.4%.  This is the lowest unemployment rate we have seen since December 2008.  Neither the payroll nor the household survey offers a perfect indicator of job market progress, but both surveys show employment gains continue to be fast enough to gradually reduce the unemployment rate.

Based on the age structure of the population, I estimate U.S. employment would need to be about 7.2 million higher to bring us back to full employment.  At the current moderate pace of employment growth it will take five or six more years to achieve that goal.  The GDP report issued earlier this week suggests the economy continues to improve, though at a moderate pace.  Contrary to claims that the nation has made little or no progress toward full employment, we have in fact eliminated about a quarter of the gap between current employment levels and the level of employment needed to produce full employment.  At the worst point of the recession, I estimate the nation’s employment shortfall was about 10 million.  Over the course of the recovery the shortfall has shrunk by more than 2.5 million.

In arguing that the unemployment picture remains basically unchanged, some observers point to the labor force participation rate and employment-to-population ratio.  The labor force participation rate in July was 63.4%, only 0.1% above its recent low.  The employment-to-population rate was 58.7%, just 0.5% above its recent low and 4.0% below the level at the end of 2007.  Both the labor force participation and employment rates are affected by the age distribution of the adult population, however.  Somewhat more than half of the decline in the participation rate since 2007 can be explained by the rapid aging of the population past 16.  Even if we had maintained full employment in every month after 2007 changes in the population age structure would have reduced the participation rate by about 1.3%, a bit more than half of the decline we have seen.  Similarly, shifts in the age distribution of the population have subtracted about 1.3% from the expected employment-to-population ratio since 2007.  The actual employment rate has fallen 4.0 percentage points, so population aging accounts for almost a third of the drop in the employment-to-population ratio.

For job seekers, especially the long-term unemployed, the employment outlook continues to be poor.  It is worth emphasizing, however, that the job picture is gradually improving, though at a heartbreakingly slow pace.

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