A disappointing jobs report

Despite showing periodic signs of strengthening, the U.S. labor market in recent months has continued to be a major disappointment. Nowhere was this more evident than in the December jobs report issued Friday by the Labor Department.

On the surface, the news appeared to be good. The unemployment rate, according to the household survey, fell from 5.9 percent in November to 5.7 percent in December. The reduction in the unemployment rate, however, was directly attributed to the fact that more than 300,000 people quit looking for work and left the labor force. The total number of unemployed workers fell by more than 250,000 not because they found jobs but because they quit looking for them — and, hence, were no longer part of the labor force, from which the unemployment data are calculated.

The payroll survey of nonfarm business establishments was also disappointing. Analysts expected the payroll survey to reflect 150,000 new jobs in December, but only 1,000 were created. Worse, October and November payroll jobs were revised downward by 51,000. In other words, 50,000 more jobs were lost due to revisions of previous data than were created in December.

In addition, the average workweek declined in December by 0.2 hours, suggesting that labor demand may be less than indicated by other, more optimistic reports. In particular, the manufacturing employment index compiled by the private Institute of Supply Management increased sharply in December. But the nonfarm payroll survey revealed that manufacturing lost another 26,000 jobs in December. It was the 41st consecutive month of manufacturing job losses.

During the six months since June, nonfarm employment has increased by only 221,000. (By contrast, during the eight years of the Clinton administration, the average monthly job growth exceeded 221,000.) What makes such sluggish job creation over the past two quarters particularly disappointing is the fact that it has occurred during a period of rapid economic expansion. After increasing at an annual rate of 3.1 percent in the second quarter, gross domestic product advanced at a blistering 8.2 percent pace during the third quarter. Most economists believe the fourth-quarter growth rate exceeded 4 or even 5 percent. Despite such rapid acceleration, however, average monthly nonfarm employment during the fourth quarter was only 125,000 jobs greater than that of the second quarter.

To be sure, recent large increases in the rate of productivity, or output per hour, have made the demand for labor less than what it otherwise would be. During the third quarter, for example, productivity in the nonfarm business sector increased at an annual rate of 9.4 percent. Thus, businesses have been able to expand production without increasing their work force.

Theoretically, productivity increases should translate into comparable increases in wages. For both 2002 and 2003, the annual increase in productivity will surpass 5 percent. However, despite a cumulative two-year increase in productivity of more than 11 percent, the inflation-adjusted hourly wage of production and nonsupervisory workers, who comprise more than 80 percent of the labor force, has increased by less than 3 percent over this two-year period. Thus, the weakness of today’s labor market manifests itself in more ways than merely its glaring failure to generate adequate job growth.