The State of the U.S. Labor Market: Pre-August 2016 Jobs Release

Workers make sandwiches in Seattle on March 3, 2015.

Tomorrow, the U.S. Bureau of Labor Statistics will release its July employment report. After May’s disappointingly low employment growth and June’s unexpectedly strong rebound, the July data could signal the Federal Reserve’s next move on interest rates. In June, just as it seemed as though the Fed governors would finally agree to raise the benchmark interest rate, the release of May employment data and the Brexit vote gave them pause. Still, June’s job growth comeback has caused speculation that the governors may raise interest rates soon—if this month’s numbers impress. And as if that were not significant enough, this Friday is also one of only four jobs reports left before Election Day.

June’s report caused quite a stir: Not only did it announce significant additions of 287,000 jobs, but it also updated May’s number of new jobs to 11,000, much lower than originally published. This divergence means that July could be a similarly unpredictable nail-biter.

Although the unemployment rate is the most frequently cited indicator of labor market health, other factors can provide a fuller picture of how the economy—particularly the job market—is performing. Among the indicators in the July jobs report that deserve attention are the prime-age labor force participation rate, the number of people working part time for economic reasons, the rate of wage growth, and the U-6 unemployment rate. Each of these indicators—along with the demographic differences within them—give important context on the health of the labor market. For example, although the headline June unemployment rate was 4.9 percent, the rate for African Americans was several points higher at 8.6 percent. Here is an overview of the trends to watch before the release of July’s data.

Although the unemployment rate is at prerecession levels, other labor market health indicators have yet to recover fully

In the past year, the labor market has seen robust job growth at an average rate of about 206,000 new jobs per month. Meanwhile, wages have ticked up 2.6 percent over the past year, and the number of long-term unemployed workers has finally slipped lower than it was last summer. June 2016 marked the 21st consecutive month that the headline unemployment rate—otherwise known as U-3—was less than 6 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 U.S. employment situation.

unemployment rate

Prime-age labor force participation rate

The prime-age labor force participation rate measures the percentage of all eligible people between the ages of 25 and 54 who are working or formally unemployed. It differs from the overall labor force participation rate, which includes everyone ages 16 and older. With so many Baby Boomers nearing retirement or retiring, this is an important distinction to make, as the prime-age indicator is less affected by demographic trends.

The labor force participation rate, in decline since 2000, should signal the health and motivation of the U.S. workforce. A growing labor force participation rate suggests that there are good, high-paying jobs available to draw workers off the sidelines and incentivize employment. As shown in Figure 2, both the prime-age and overall labor force participation rates have decreased, indicating that the decline is not only due to retirees exiting the labor force but also to discouragement among workers.

labor force participation rate

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.

U-3 vs. U-6 unemployment

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 June, the number of involuntary part-time workers decreased by 587,000 people, offsetting the May increase of 468,000 part-timers.

part-time work

Wage growth still lags far behind employment growth

Americans are still waiting for a raise. Due to the slack caused by slow employment growth, real wage growth remains largely stagnant after years of sluggishness. Continuing the trend of the past 30 years, middle-class workers continue to grapple with the challenges of rising prices for basic needs, such as health care and housing, even while corporate profit growth has been strong. While wages have ticked up slightly in 2016, more growth is needed to help working families make up lost ground.

wage growth

Overall job growth in this recovery has been puzzlingly slow relative to previous economic expansions and to other indicators in this expansion. 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, there have been only 21 months of job growth greater than 250,000—including the additional, abnormal hiring of surveyors involved with conducting the decennial census. In other words, the economy has seen better days after a downturn.

employment after recessions

The unemployment rate has not recovered to prerecession rates for all demographics

The Great Recession affected different demographic groups to different extents, with African Americans among those hardest hit. This will come as no surprise to anyone paying attention to the economic landscape, but the absence of labor market recovery for African Americans remains both a shock to observers and an untapped opportunity for future growth. While the overall unemployment rate fell from 10 percent to 4.9 percent between October 2009 and June 2016, the rate for African Americans only dropped from 15.8 percent to 8.6 percent in the same time frame. Accounting for wealth lost when the housing bubble burst, it is even more apparent that losses to African American communities are compounded by a lagging labor market recovery.

African American unemployment

Conclusion

Although the unemployment rate has seen a strong recovery, other indicators of labor market health show room for improvement. The July employment data could help paint a picture of a broader labor market recovery if the indicators discussed here demonstrate positive growth. The recovery of these indicators could also signal an interest rate hike in the near future, as the Fed will be watching closely to decide whether the economy is strong enough to handle an interest rate increase as soon as September. Just as important as multiple labor market indicators, however, are demographic discrepancies, which are crucial to cultivating an informed perspective on the economic outlook. Although some indicators appear to have recovered, it is worth remembering that not all groups have experienced the recovery in the same way. Working toward inclusive prosperity requires understanding inequities and crafting policy with all people in mind, especially at the powerful Federal Reserve.

Michael Madowitz is an Economist at the Center for American Progress. Juliana Vigorito and Annie McGrew are Special Assistants for the Economic Policy team at the Center.