The 2015 job market: Continuing recovery, ongoing problems

With the upcoming release of the December job market numbers this Friday, we will be able to review labor market performance for all of 2015.  Based on the reports we have seen so far, what will the numbers tell us about the past year, as well as longer-term trends?

Overall, they will show a labor market that continues to recover from the Great Recession.  At the same time, a lack of progress on a number of fronts will suggest some serious longer-term problems, which existed before 2008 but were exacerbated by the recession and the slow (though steady) recovery since then.

First, the good news: The U.S. unemployment rate will have dropped by nearly a full percentage point this year and will be at or near 5 percent, which historically has indicated an economy close to full employment.  Payroll job growth will show a solid rate of nearly 240,000 per month, or nearly 3 million new jobs for the year.  Other measures of labor market activity – such as the numbers of long-term unemployed workers and those working part-time for economic reasons – will show improvement this past year as well.

But we will see little progress on two crucial measures: labor force participation and average wages.  The nation’s labor force participation rate, at or near 62.5 percent, will remain about 4 percentage points below its recent peak in 2006.  Of course, we always knew that Baby Boomer retirements would drive down this number, but retirements account for only about half of the total decline in work activity over the past decade. 

In fact, labor force participation among those below age 65 (or even 55) has recovered very little since the Great Recession ended, and its decline reflects a longer-term decrease for some groups – most notably, less-educated men.  Their declining work activity reduces income not only in their own families and communities, but also shrinks the productive capacity of the economy as a whole.

Hourly wage growth this year will average about 2.3 percent for workers overall, and about 2 percent for production and nonsupervisory workers.  These numbers are slightly better than what we’ve observed in other years of the recovery, and wages adjusted for inflation this year did increase (but only because inflation was well below 2 percent this year, driven down by declining oil prices). The continued weakness in wage growth this year indicates continued slack in the labor market. 

Labor force activity and wage growth might improve in 2016, as the labor market continues to tighten and unemployment keeps falling.  As employers in more sectors begin to have trouble attracting and retaining workers, their willingness to improve worker compensation should rise.  Rising pay, in turn, might draw more workers back to the job market.

But any optimism on these fronts must be tempered by a few other facts and trends.  For one thing, as my Brookings colleagues Martin Baily and Barry Bosworth have pointed out, productivity increases over the past several years have been very disappointing, and have averaged well below 1 percent annually for each of the past four years.  Even in a tightening job market, limited productivity means limited room for wage growth of U.S workers.  In addition, job growth in this recovery has been strongest in low-wage job sectors – like retail trade and hospitality.  And flat wages will do little to encourage labor market dropouts to return to return.  

We don’t fully understand what drives our disappointing recent national trends in productivity and wages.  But, almost certainly, the low level of labor market skills we still observe among so many Americans plays some role.  In today’s labor market, wages will remain very modest for any worker without some postsecondary education or training.  Yet, despite huge increases in college enrollments over the past few decades, less than half of our young people attain such a credential – since degree completion rates in community colleges and other institutions remain very low. 

In addition, among those obtaining credentials, many have little labor market value, and many students enter the workplace with few of the broad analytical or specific occupational skills that employers seek and reward.  Perhaps it should then be less surprising that employers create so many low-wage jobs, when they expect and ultimately find so many low-skill workers to fill them.

Any hopes of improving worker productivity and wages in 2016 and beyond will therefore require more than labor market tightness to improve these outcomes.  Helping students and workers obtain better skills and credentials, while encouraging employers to improve job quality and wage levels, should be high on the job market policy agenda.       

Editor’s note: this piece first appeared in Inside Sources.