The economy generated 193,000 new jobs in January, the Bureau of Labor Statistics (BLS) reported today. While this is certainly better than the previous months, it still leaves the labor market with much catching up to do. For instance, the average job growth over the past six months was 158,000, barely enough to keep job growth in line with population growth. The share of the adult population that had a job – the so-called employment to population ratio – was only slightly higher in January 2006 with 62.9 percent than in August 2005, when it was 62.8 percent. Similarly, for the past 12 months, monthly job growth averaged 1.6 percent on an annualized basis, about 28 percent less than the historical average. This is also reflected in last month’s employment growth, which was again below average. So far, only six months out of 58 months during this business cycle, which started in March 2001, showed job creation above the long-term growth rate prior to March 2001.

The good news is that employment creation was rather broad-based. Construction added the most jobs with 46,000, followed by health care with 37,500 new jobs and restaurants with 31,000. If broad-based employment creation continues on a sustainable basis, American families may ultimately be able to recover from the shortcomings of the labor market in recent years.

To see why the labor market has failed over the course of the business cycle to create sufficient opportunities for people to advance economically, consider the following. To improve their living standards, people typically need a well-paying job. Hence, the crucial indicator to consider is the share of the population that has a job, the employment to population ratio. Importantly, because the labor market has been weak, millions of Americans have been unable to find the economic opportunities they are looking for. This is especially true for women and minorities.

In March 2001, 64.3 percent of the adult population was employed. In January 2006, it was 62.9 percent. In the three previous business cycles of at least the same length, the employed share of the population generally recovered to the levels where it was prior to the last recession (figure 1). The difference from previous business cycles is especially striking for women and for African Americans. At this point in the business cycle, the employed share of women had risen by 1.5 percentage points, while it was down by 1.4 percentage points in January 2006 as compared to March 2001. Also, the employed share of African Americans typically rose by 0.7 percentage points, whereas it declined by 2.7 percentage points from March 2001 to January 2006. Consequently, the employed share of employed black men has dropped the most since March 2001 with 2.7 percentage points, followed by black women with 2.6 percentage points (figure 1).

If the employed share of the population had stayed the same as in March 2001, an additional 3.2 million people would have been employed. With these additional job seekers, the unemployment rate would actually total 6.7 percent, instead of the reported 4.7 percent.

Notes: Author’s calculations based on Bureau of Labor Statistics, Employment to Population Ratio, Washington, D.c=: BLS. All figures are in percentage points. Prior business cycles include December 1973 to September 1978, January 1980 to November 1984, and August 1990 to May 1995.

Stronger job growth is certainly welcome, especially given that millions of Americans are still unable to get the jobs that they are looking for. However, America’s middle class needs more and better paying jobs. Weak employment growth has had repercussions for wages. Because employers can hire from a large pool of job seekers, there was little pressure for them to raise wages. For instance, after adjusting for inflation, wages did not rise for three years in a row. Today’s figures show some initial signs that wage gains may be improving. In January, hourly and weekly earnings rose by 0.4 percent, similar to the growth rates of December. If such wage and employment gains continue on a sustained basis in the near future, it may signal the beginning of a healthier labor market trend. This would certainly be welcome news for middle-class families who are struggling with high costs for energy, housing, health care, and education and massive amounts of debt.

Christian Weller is a Senior Economist at the Center for American Progress, where he specializes in Social Security and retirement income, macroeconomics, the Federal Reserve, and international finance.

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Christian E. Weller

Senior Fellow