Payroll Gains Slow; Unemployment Rate Tumbles, Mostly for Wrong Reason

Contrary to most analysts’ expectations, the latest jobs report showed total payroll gains slipped to just 74,000 in December. This is well below monthly payroll gains earlier in the year, which averaged 192,000. Some of the drop is explained by continued weakness in government payrolls, which sank 13,000 in December. However, the pace of growth in the private sector also fell sharply in December, declining from 193,000 a month in January-November to just 87,000. Partially offsetting the bad news was a revision in BLS’s estimate of payroll gains in November, which was raised by 38,000. On average in the past 12 months employer payrolls have increased 182,000 a month, almost exactly the rate of gain we saw in 2012. All the gains took place in the private sector. Government employment fell slightly over the year.

At first blush the household survey presents a brighter picture of job market progress in December. The headline unemployment rate number fell 0.3 points to 6.7% This is the lowest unemployment rate since October 2008, one month after Lehman Brothers declared bankruptcy. The number of adults reported as unemployed fell 490,000, also reaching a low not seen since October 2008. Unfortunately, less than a third of the decline can be traced to an increase in the number of adults who say they are employed. The other two-thirds was due to a drop in the size of the labor force, which fell 347,000 in December. Over the past 12 months the U.S. labor force has shrunk almost 550,000 and the labor force participation rate has dropped 0.8 percentage points.

Since the end of 2007, when the Great Recession began, the adult participation rate has fallen a total of 3.2 percentage points, with more than half the decline occurring after the economic recovery began. Some of the drop can be explained by the aging of the population. A larger percentage of adults is past 55, ages when Americans are likely to be retired. However, a sizeable fraction of the participation-rate decline has been among the population under 55 and especially among people between 16 and 24. Young adults, who may be discouraged by their job prospects in a weak labor market, have seen increases in school and college enrollment. Many prime-age adults are also discouraged by their job prospects and have withdrawn from the workforce. Most may stay out until their chances of finding employment improve.

The expiration of extended unemployment benefits at the end of December is likely to accelerate the drop in adult participation rates. About 1.3 million long-term unemployed lost their benefits at the start of this year. Workers who receive an unemployment check are obliged to look for work, so an overwhelming share of them are likely to describe themselves as active job seekers in the household survey. When they lose their benefits, many who remain jobless will sooner or later stop looking.

Payroll gains in December were mainly traceable to employment increases in retail trade, manufacturing, and professional and business services. Construction and government employment sank. Though construction payrolls have increased over the past 12 months, they remain more than one-fifth smaller than they were when the Great Recession began. They are about one-quarter smaller than at the peak of the housing boom. The best we can say about government employment is that it shrank less in 2013 than it has in any year since 2008. Total public plus private payroll employment is still almost 1.2 million below its level at the start of the Great Recession. Almost half the net job losses occurred in the public sector. Since the recovery began in late 2009, the drop in government employment has offset about 8% of all payroll gains in the private sector.

The latest job numbers highlight the uneven nature of the recovery. Real hourly and weekly earnings are only slightly higher than they were at the end of the last economic expansion. Even though the number of long-term unemployed continues to shrink, it remains almost three times higher than it was when the recession began. The reported number of long-term unemployed would undoubtedly be much higher if millions of able-bodied adults had not withdrawn from the labor force because of pessimism about finding work. On the other hand, business profitability has soared and stock market prices have hit new records in recent months. The job market is healthier than it was in December 2012, but it remains a long way from robust good health.