On Friday, the U.S. Bureau of Labor Statistics will release the employment report for the month of May. This month’s data will tell us whether 5 percent unemployment is sticking around for a third consecutive month and if long-term unemployment will see another drop similar to April. Many are watching with bated breath, in no small part due to the possible June rate hike suggested by the Federal Reserve. As economic recovery continues, Fed governors have started to show an itchy trigger finger in the pursuit of target inflation. For the time being, however, the below-target inflation level is helping maintain confidence among businesses and consumers, as well as bolstering purchasing power at a time when wage growth is still not up to par. A rate hike this soon is a vote against encouraging the economy to keep up its strong performance and may have a broader chilling effect than policymakers can anticipate.
After the February employment release, word got out that Federal Reserve officials would raise interest rates only two times this year instead of the planned four. While this change of plans initially showed promising reconsideration by the Fed, the intended rate hike is just not what the data prescribe.
The national unemployment rate for the month of April held steady at 5.0 percent, just half its peak of 10 percent in October 2009. In the past year alone, the labor market has seen robust job growth at an average rate of about 226,000 new jobs per month. Even so, wages have been lagging behind growth in jobs more than usual after the deep recession, and the number of long-term unemployed workers has stayed mostly steady since last summer.
Here is a quick look at the labor market trends to watch as the release of the upcoming report approaches.
Job growth has picked up, but the depth of the Great Recession means that employment growth since before the recession still lags behind historical standards
There were 12.9 million more jobs in April 2016 than in June 2009, when the recession officially ended. During this same time period, the private sector added 13.3 million jobs. In April 2016 alone, the private sector added 171,000 jobs to the economy, marking 74 months of consecutive private-sector job growth.
Overall, job growth has been particularly robust over the past year, with average growth of 226,000 jobs per month since April 2015. However, job growth in this recovery has not been especially robust relative to previous economic expansions. During the economic expansion of the 1990s, for example, the economy added at least 250,000 jobs per month 49 times. During the current expansion, which has now lasted more than half as long, we have seen 21 months of job growth greater than 250,000, which includes abnormal hiring involved with conducting the decennial census. Combined with the extraordinary job losses that the U.S. economy sustained during the recession, the pace of both job and wage growth suggests that there is much more slack in the labor market than the headline unemployment rate may indicate.
Headline unemployment hits a record low, but other economic measures show room for improvement
April 2016 marked the 19th consecutive month that the headline unemployment rate—otherwise known as U-3—was less than 6 percent, as it stayed flat at 5.0 percent. While this does mark significant progress in the recovery, it is important to remember that there are broader measures of unemployment that paint a clearer picture of the employment situation.
U-3, the typical measure, is pretty restrictive, as it counts the percentage of people who are actively looking for work but cannot find it. U-3 does not, however, capture the millions of people who want jobs but have given up looking or who would like full-time work but cannot find it in this economy. Perhaps the most comprehensive unemployment measure, called U-6, alleviates this problem by including marginally attached workers—those who have recently looked for work but are not currently looking—and those working part time but 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.
Another important measure is the labor force participation rate. When the economy is doing well, more people typically enter the labor market because there are more jobs available. So one should expect the labor force participation rate to be increasing in the aftermath of the recession. However, it hasn’t been. Rather, it has declined since the recession’s end and is as low today as it was in the late 1970s, when women entering the workforce became the norm. After slipping down slightly from March to April, labor force participation is still low by historical standards, which suggests that there is considerable room for job gains going forward.
Long-term unemployment is down sharply but still remains high
In November 2015, long-term unemployment was at a record low since the end of the recession, hitting less than one-third of its postrecession peak. Today, while down sharply, the number of long-term unemployed people is still nearly as high as its highest prerecession level in 2003. There are still more than 2 million Americans who have been unemployed for more than half a year and are still actively searching for work. 25.7 percent of all unemployed workers fall into this long-term unemployed category. The average length of time someone has spent unemployed is about seven months, well above what it was right before the recession.
Americans are still waiting for a raise. Due to the slack caused by slow employment growth, real wage growth remains essentially stagnant. As depicted above, the labor market has experienced significant gains in employment in this recovery, but growth remains slow by historical standards. Slow employment growth has caused slack in the labor market, thereby leading to stagnation in real wage growth. Continuing the trend of the past 30 years, while corporate profit growth has been strong, middle-class workers continue to grapple with the challenges of rising prices for basic needs, such as health care and housing, and slow wage growth.
Conclusion
While meaningful progress has been made since the end of the Great Recession, it is important to remember that many Americans are still suffering from its effects. It’s not exactly a secret that the Great Recession was much deeper than any other recession in recent memory, and slack in this recovery still remains. Identifying the exact cause of the considerable slack in the labor market is a challenge—maybe it’s the underperformance of the housing sector or of Congress—but the slack in the economy is real. Many people who want full-time work are still missing from the labor force or are working fewer hours than they would like. These workers are the key to raising the nation’s potential economic output and future gross domestic product, or GDP. Beyond employment gains, wages had stalled before the recession, and they have yet to accelerate in the recovery.
This is the real challenge that the Federal Reserve faces: It is hard to predict what wage and price growth will do as the economy picks up steam, but so far, workers seem to be slowly coming off the sidelines, raising employment but tempering wage growth. However, this cannot happen forever. As the economy picks up speed, the Fed should stay wary of raising rates much higher, especially until broader measures of unemployment improve. Pulling the long-term unemployment rate down and raising wages are the next challenges facing the Fed, and a rate hike can wait.
Michael Madowitz is an Economist at the Center for American Progress. Juliana Vigorito is a Special Assistant for the Economic Policy team at the Center.