Another Year of Modest Labor Market Gains

Employment increased modestly, unemployment edged down, and wage gains trailed price inflation in 2011. By the end of the year, the recovery from the nation’s worst post-war recession will be 2½ years old, but the health of the labor market remains precarious.

Over the past year private employers added payroll jobs at a fast enough clip to reduce the number of unemployed. Some of the private job gains, however, were offset by drops in government payrolls. Slightly more than 90,000 new jobs are needed every month to keep up with the growth of the working-age population. In the 12 months ending in November 2011 private employers added about 157,000 jobs a month to their payrolls. Unfortunately, job losses in the public sector, mostly in local governments, offset some of these gains. Federal dollars helped state and local governments maintain their payrolls early in the recession, but those dollars were not large enough to shield public employees against the effects of lower state and local tax revenues.

On average, total public and private payrolls increased 133,000 a month, which should have been fast enough to reduce the unemployment rate over the year by about 0.5 percentage points. Instead, the unemployment rate dropped 1.2 percentage points, falling from 9.8% to 8.6%, in twelve months after November 2010. The unemployment rate fell this rapidly because the labor force participation rate - that is, the percentage of the adult population that either holds a job or is looking for one - fell for the fourth successive year. Indeed, though the growth in the working-age population should have increased the size of the workforce by more than a million, the labor force actually shrank slightly in the 12 months through November 2011. Some jobless workers, discouraged by their poor prospects of finding a job, have simply dropped out of the labor force. Other potential job seekers have failed to enter the workforce though they would have done so in a healthier labor market.

Some of the unemployed stop looking for a job when they exhaust their unemployment benefits. The 2009 stimulus program and follow-up legislation offered extensions in unemployment insurance (UI) that were exceptionally generous by American standards. Most laid off workers are eligible for up to 6 months of jobless benefits when the unemployment rate is low and the economy is expanding normally. In every recession since the late 1950s, however, Congress has authorized temporary extensions of unemployment benefits. Legislation passed in 2008 and 2009 provided add-on benefits that can last up to 73 additional weeks, offering workers in high-unemployment states up to 99 weeks of UI benefits when they are laid off. In previous recessions, the maximum duration of unemployment benefits was limited to 65 weeks or less.

The availability of extra benefits may deter some unemployed workers from accepting low-wage jobs they would otherwise have accepted, especially in the months they are collecting extended UI. Equally important, by providing weekly cash payments to workers who continue to look for a job, extending benefits induces some jobless workers to continue looking for work long after they would have given up their search if benefits were unavailable. Many workers have exhausted their unemployment benefits over the past year. Between January 2010 and September 2011 the number of Americans collecting unemployment benefits dropped almost 5 million. Whereas 73% of the unemployed claimed UI benefits in January 2010, only about 52% were collecting them this past fall. Some of the workers exhausting benefits have stopped looking for work. If Congress allows the UI benefit extensions to lapse in 2012, a sizeable fraction of the unemployed will soon be dropped from the extended UI rolls. (In November 2011 slightly more than half of UI recipients were collecting benefits under an extended or emergency benefit program.) The loss of benefits will induce some of the unemployed to look harder for work and accept jobs they otherwise would have rejected. Jobless workers who think there is little chance they will find a job may simply give up the search for a job and be reclassified as "out of the labor force."

When the unemployment rate is over 8%, finding a job is tough for the unemployed. In late 2011 there were approximately 4.2 unemployed workers for each job opening. This is a considerable improvement compared with late summer 2009, when there were almost 7 job seekers for every job opening. (Near the end of the 2002-2007 economic expansion there were approximately 1.5 job seekers for each job opening.) The odds of finding a job tend to fall the longer a worker has been unemployed. As the economic expansion continues the chances that employed workers will be dismissed from their jobs has also declined. The BLS labor turnover survey suggests that the layoff rate in 2011 is not only sharply lower than it was during the recession, it is also about one-third below the rate in the year before the recession began. The hiring rate, however, remains well below the rate in the previous economic expansion, though it has picked up compared with the low point attained in summer and early fall of 2009. The hiring rate must improve dramatically if we are to see a sharp decline in the unemployment rate.

A tough job market makes employed workers more reluctant to quit their jobs. The BLS turnover survey shows that the number of workers quitting their jobs in 2011 was about half the level observed in 2007, the last year before the most recent recession. The quit rate increased in 2011, but remains low compared with the rate before the recession began. The combination of high unemployment and employee reluctance to quit has reduced workers' bargaining power with their employers. Real wages declined about 1.5% in the 12 months through October 2011. Total hourly compensation has fallen a bit more slowly, because the cost of health and other fringe benefits has increased faster than wages. Despite the economic expansion, workers are receiving lower real compensation than they did a year ago.

Real hourly compensation is roughly unchanged from its level when the recession began. Over the 2007-2011 period, average worker productivity increased about 7.2%. One reason that average compensation stagnated while labor productivity improved is that a rising share of output is being received by business owners while a smaller share is going to workers in the form of labor compensation. That is, business owners now receive a larger percentage of the dollars generated by the value added in their businesses; workers receive a smaller percentage. The share of nonfarm business output received by workers dropped almost a tenth between 2000 and 2011, with nearly half the decline occurring after the onset of the recession in late 2007. According to preliminary BLS statistics, the percentage of output received by workers hit a post-war low in 2011.

In sum, 2011 saw improvements in the labor market in the form of a modestly higher employment rate and a 1.2-percentage-point drop in the unemployment rate. If the labor force participation rate had remained constant, the fall in unemployment would have been only half as large. Partly offsetting the improvement in employment was a drop in real hourly wages and compensation. Workers now receive a smaller share of business output than has been the case at any point since World War II. The shrinking worker share in business output can undoubtedly be traced to workers' weak bargaining position relative to employers. Until we see a robust improvement in aggregate demand or a major swing in public policy, the bargaining position of American workers is likely to remain weak.