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

Workers assemble Volkswagen sedans in Chattanooga, Tennessee, on June 12, 2013.

On Friday, the U.S. Bureau of Labor Statistics will release the employment report for the month of September. After a softer than expected August jobs report and encouraging new CPS data on wage growth, this month’s data will be our penultimate indicator of where the economy is headed before the election. At this point in the recovery, each new data point is important as the Federal Reserve continues to debate how to improve the labor market without touching off inflation. The Fed held off raising rates in their September meeting, but not without dissent. Three Federal Open Market Committee (FOMC) members dissented at the September meeting, while only one member dissented at July’s meeting. Increasing dissent could signal increased risk of an interest rate hike this year. However, low inflation and the beginnings of much-needed real wage growth clearly signal that based on macroeconomic factors, a rate increase would be premature.

Although the headline unemployment rate—otherwise known as U-3—is the most frequently cited indicator of labor market health, other factors can provide a fuller picture of how the economy—particularly the labor market—is performing. Among the indicators in the September jobs report that deserve attention are the prime-age labor force participation rate, the number of people working part time for economic reasons, and the U-6 unemployment rate. Each of these indicators give important context on the health of the labor market. Additionally, it is important to keep in mind the racial differences within these indicators. For example, although the headline August unemployment rate was low at 4.9 percent in August, the rate for African Americans was significantly higher at 8.1 percent. Below is an overview of the trends to watch before the release of September’s data.

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

In the past 12 months, the labor market has seen robust job growth at an average rate of about 204,000 new jobs per month. Meanwhile, the number of long-term unemployed workers has finally slipped lower than it was last summer, and August 2016 marked the 23rd consecutive month that the U-3 rate 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.

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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.

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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.

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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 August, the number of involuntary part-time workers increased by 113,000 people, following the July increase of 97,000 part-timers.

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Wage growth finally improves, but more progress is needed

This month’s new data from the U.S. Census Bureau shows that, finally, American households are seeing their incomes rise after the Great Recession. In 2015, the median household income rose by 5.2 percent to $56,516, a much-needed boost after three years of statistically insignificant changes. While this is welcome news, it is important to remember that much more work is needed to keep middle-class incomes growing at a healthy pace.

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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 23 months of job growth greater than 250,000—including the additional, abnormal hiring of surveyors involved with conducting the decennial census. One major reason for the sluggish employment growth has been a lack of government hiring, especially by state and local governments. The nation has ground to make up in hiring teachers, police officers, and firefighters, as the property tax revenues local governments rely on to finance these positions are only now recovering from the housing crash.

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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 August 2016, the rate for African Americans only dropped from 15.8 percent to 8.1 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.

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Conclusion

Although the unemployment rate has seen a strong recovery, other indicators of labor market health show room for improvement. The September 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 in the near term. 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. Gregg Gelzinis and Annie McGrew are Special Assistants for the Economic Policy team at the Center.