The State of the U.S. Labor Market: Pre-February 2017 Jobs Release
Part of a Series
On Friday, the U.S. Bureau of Labor Statistics, or BLS, will release its “Employment Situation Summary” for the month of January. The debate surrounding President Donald Trump’s inaugural crowd size and Press Secretary Sean Spicer’s “alternative facts”—as described by Counselor to the President Kellyanne Conway—makes this month’s jobs release a good time to reiterate the importance of accurate and timely labor market data.
When policymakers make crucial decisions on fiscal and monetary policy, they need access to reliable data. It would be imprudent to blunt economic growth by raising interest rates if unemployment is climbing steeply or to risk inflation by passing a massive stimulus bill when the labor market is already running hot. To make the right decisions and successfully maintain a healthy economy, policymakers need to have an accurate picture of what is happening. The first few weeks of the Trump administration have given many pause about the future reliability of economic data, and economists are worried that the administration may attempt to undermine official unemployment numbers. The integrity of government data is paramount to effective and reliable policymaking—even if the administration in office does not like what the numbers say.
The Federal Open Market Committee met Wednesday and voted to hold interest rates steady. But the committee is expected to make three interest rate hikes in the coming year, depending on the trajectory of the labor market. It is important to have a full picture of the overall trends—as well as to understand different measures of the health of the labor market and different demographic groups—as the Federal Reserve decides whether the economy is at risk of overheating, warranting increasing interest rates to prevent inflation.
The headline unemployment rate—otherwise known as U-3—is the most frequently cited indicator of labor market health. However, other factors can provide a fuller picture of how the economy, particularly the labor market, is performing. The prime-age employment-to-population ratio, the labor force participation rate, the number of people working part time for economic reasons, and the U-6 unemployment rate are some of these factors. Additionally, it is important to remember that the labor market is far from homogenous. Rather, it is formed by people of all ages, races, genders, and income levels. This column discusses how these labor market indicators differ for men and women.
Although the unemployment rate is at prerecession levels, other labor market health indicators have yet to recover fully
Entering the new year and looking back at 2016, the labor market saw robust job growth at an average rate of about 180,000 jobs per month in 2016. However, the average growth in 2015 was larger, adding an average of 229,000 jobs per month. Hopefully, 2017 will continue to bring robust job gains. Meanwhile in 2016, the number of long-term unemployed workers has continued to fall, and December 2016 marked the 28th consecutive month that the U-3 rate was less than 6 percent. While this does mark significant progress in the recovery from the Great Recession, it is important to remember that there are broader measures of unemployment that paint a clearer picture of the U.S. employment situation.
The employment-to-population ratio measures the share of employed people in the United States. This differs from the labor force participation rate, which measures the share of all people who are employed and formally unemployed. The prime-age employment-to-population ratio measures the share of people from ages 25 to 54 who are employed. The prime-age measure is often seen as a better indicator of labor market health, since it is unaffected by the large number of Baby Boomers who may be retiring.
The prime-age employment-to-population ratios for men and women seemed to be converging in the 1980s. However, this convergence halted in the early 2000s. The employment-to-population ratio for men took a larger hit than that for women during the Great Recession but also recovered more quickly afterward.
A similar trend can be seen in prime-age labor force participation rates for men and women. While the two rates seemed to move towards convergence at one time, convergence halted in the 2000s when labor force participation for women largely stagnated. This stagnation differs from other advanced economies where the labor force participation rates for women and men have been rising. A 2013 National Bureau of Economic Research study found that almost one-third of the U.S. female labor force decline in relation to other Organisation for Economic Co-operation and Development countries could be explained by the United States’ lack of family-friendly policies and part-time work entitlements.
The number of people working only part time for economic reasons remains very high
The number of workers who are employed only part time for economic reasons—meaning that they are unable to find full-time work despite wanting it—indicates slack in the labor market. If workers are part-time because their hours are cut or because they cannot find a full-time job, that indicates a labor market that is less favorable for all workers. In December 2016, the number of involuntary part-time workers ticked down slightly to 5.6 million, or 5.7 percent of the U.S. workforce.
More women work part time for economic reasons than men. In December, 3 percent of prime-age working women worked part time for economic reasons while only 2 percent of working men did. Unlike employment-to-population ratio and labor force participation, this difference cannot be partially explained by family-friendly work policies or differences in the way households separate labor. There is not a clear explanation for why more women would have to work part time for economic reasons than men, since the indicator suggests that these women workers would prefer to work full time.
U-3 vs. U-6
The U-3 unemployment rate does not capture the people who want jobs but have given up looking for work or the people who would like full-time work but can only find part-time positions. Perhaps the most comprehensive unemployment measure, U-6 alleviates this problem by including marginally attached workers—those who have recently looked for work but are not currently looking—and part-time workers who would prefer full-time work. U-6 is always higher than U-3, but the gap grew much larger than usual during the recession and has remained above or near prerecession records over the course of the recovery.
Although information on U-6 by gender is not easily attainable, the fact that more women work part time for economic reasons indicates that women may have a higher U-6 employment rate than men even though U-3 for men and women is largely the same. This is because U-6 includes U-3 but adds marginally attached workers and part-time workers for economic reasons.
The unemployment rate has not recovered to prerecession rates for all demographics
The gains from the recovery have been spread unequally between different demographics, and those with historically worse labor market conditions continue to face higher unemployment rates with long-term detrimental effects. While the overall unemployment rate fell from 9.9 percent to 4.7 percent between December 2009 and December 2016, the rate for African Americans only dropped from 16.1 percent to 7.8 percent during the same time frame. Focusing on the groups whose unemployment rates continue to have room for improvement can be a benchmark for the health of the U.S. labor market overall. Expanding their opportunities in the labor market can be a source of future economic growth.
This January employment release will be the last release that includes data on the economy during the Obama administration. In order to maintain economic growth, the new administration must take these data seriously in its decision-making. Indicators such as the U-6 unemployment rate and the employment-to-population ratio show that there is still room to grow to meet previous eras of a strong labor market. The Federal Reserve decided in its meeting this week to maintain the interest rate to keep the economy growing, but monetary policy alone is a blunt tool that may not be sufficient to address the outcomes faced by different segments of the labor market. There is still room to increase labor force participation for women and to decrease unemployment faced by African Americans, and this untapped reserve of workers could be engaged and help the U.S. economy grow. But it will require proactive labor market policy based on good data to understand how to improve the conditions these workers face.
Kate Bahn is an Economist at the Center for American Progress. Annie McGrew and Gregg Gelzinis are Special Assistants for the Economic Policy team at the Center.
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