The State of the U.S. Labor Market: Pre-May 2017 Jobs Release

Teavana barista Riaunna Durham prepares matcha tea at the new Teavana Fine Teas and Tea Bar in Beverly Hills, California, March 4, 2015.

On Friday, the U.S. Bureau of Labor Statistics, or BLS, will release its “Employment Situation Summary” for the month of April. Over the first few months of the Trump administration, labor market trends that originated in the Obama years continued. Since the employment recovery began in February 2010, the U.S. economy has added nearly 16 million jobs, and the steady tightening of the labor market has finally started to deliver wage growth for workers, with wages increasing 2.8 percent over the past year. Last week’s preliminary gross domestic product growth release, however, revealed that the economy only grew 0.7 percent in the first quarter of 2017—the lowest growth rate in three years. This could be a sign that the economy is cooling off. It is possible, however, that seasonal factors are at play, so economy watchers will be looking for indications of continuing strength in the labor market on Friday. Another economic concern is the Trump administration’s performance in its first 100 days. Despite campaigning on increasing employment, President Donald Trump has done nothing of substance to add jobs. His only real accomplishments have come at the expense of working families.

If anything, the policies currently being pursued by the Trump administration and the Republican-led Congress may already be pushing down growth and job creation. Just this week, House Republicans held a legislative markup on the Financial CHOICE Act, their plan to eviscerate Wall Street reform that was implemented in response to the devastating financial crisis. The Dodd-Frank Act, the key piece of financial reform legislation signed into law in 2010, was designed to address the clear and unmistakable lessons learned during the financial crisis. From financial stability to consumer and investor protections, the Financial CHOICE Act guts many of the key provisions of Dodd-Frank. Rolling back these reforms invites another financial crisis, which would have a detrimental effect on employment.

Meanwhile, the Federal Open Market Committee, or FOMC, met this week to discuss how to manage interest rates, signaling some caution while leaving interest rates unchanged. While observers will have to wait a while to know exactly what was said behind closed doors, meeting less than a week after another announcement of a large, deficit-financed tax cut for corporations and the wealthy is sure to fuel the FOMC’s concerns about inflation. These concerns are likely overly aggressive, but the administration should know where the Federal Reserve stands. Broadcasting an intent to hike deficits a week before the Fed meets is an unforced error and may lead the Fed to slow down the economy in anticipation of tax cut plans.

This column presents labor market indicators to watch in evaluating both the health of the U.S. economy and the effects of the Trump administration’s policy priorities. President Trump’s promises about job growth have focused on certain sectors, such as manufacturing. However, the administration has spent much less time discussing other sectors that employ the vast majority of Americans and are more promising in providing job growth for the future. 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 is performing. The employment rate, the number of people working part time for economic reasons, and the U-6 unemployment rate—all discussed below—are some of these factors. Additionally, it is important to note how each labor market indicator differs among demographics—for example, by race. Although the national unemployment rate may be low, this indicator can tell a different story for other demographic groups.

While employment in the service sector continues to expand, manufacturing and mining inch upward

President Trump has promised to bring back coal and manufacturing jobs to U.S. workers; however, these sectors have played a diminished role in the economy since 1980—especially in recent years. Since March 1980, goods-producing employment, the top-line category that includes construction, mining, manufacturing, and others, has decreased 20 percent and remains about 5 million below its 1980 level. Service employment, on the other hand, has grown by 90 percent since 1980 and from less than three times larger than goods-producing employment to more than six times larger today. As shown in Figure 1, service employment levels are much higher than goods-producing, meaning a percentage increase in service employment has a much larger effect on overall employment levels.

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

President Trump inherited a growing economy; however, there is still room for additional growth. Although the unemployment rate—the percentage of people actively looking for a job—is at prerecession levels, Figure 1 indicates that the employment rate—the percentage of the whole population that is employed—remains below prerecession rates, meaning that a larger percentage of people fall outside of the labor market now than in 2006. This likely indicates that many people have exited the labor market due to long-term unemployment and have not yet re-entered. It is good news that the number of long-term unemployed workers has continued to fall, but work remains to bring people back into the workforce. A recovery that reaches these workers is a key to long-term economic growth.

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—remains high compared to prerecession levels. 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 March 2017, the number of involuntary part-time workers decreased slightly to 5.6 million, which is still significantly higher than the precrisis low of 3.9 million in April 2006.

U-3 vs. U-6

The U-3 unemployment rate, the most common unemployment measure, can underestimate those who are unable to find jobs. For example, it 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. A low U-6 indicates that people who face greater barriers in finding employment are being pulled back into the labor market due to greater economic opportunity. 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.

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

The gains from the recovery have not been experienced equally among 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 4.5 percent between March 2010 and March 2017, the rate for African Americans only dropped from 16.8 percent to 8 percent during the same time frame. Focusing on the groups whose unemployment rates continue to have room for improvement should 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.

Conclusion

This employment release will provide an updated snapshot of the real economy under the Trump administration. Since the Trump administration is only in its fourth month and there has been no progress on any employment-related policies in its first 100 days, it is unlikely that April’s data will show any drastic changes. However, as the months go on, the indicators highlighted above will be key in evaluating President Trump’s policies. 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 Fed continues to be an important force in keeping the economy growing sustainably, but monetary policy is likely to be tested by economic uncertainty under the Trump administration. There is still room for the economy to grow, but it will require proactive labor market policy based on good data in order to improve the conditions that American workers face. The importance of sound economic data to guide and evaluate policy decisions cannot be understated. President Trump should embrace such data, such as the monthly jobs report, in the coming months and years to help shape his policy proposals.

Michael Madowitz 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.