- The Washington Times - Saturday, November 22, 2003

The long-suffering labor market’s recent improvement is a most welcome development. Based on revised data for August and September, which accompanied October’s employment report issued Nov. 7, payroll employment has now increased for three months in a row. This favorable trend follows six consecutive months of declining payrolls. In a further sign of improvement, through the week ending Nov. 8 the four-week moving average of initial claims for jobless benefits reached its lowest level since March 2001, when the latest recession began.

Nevertheless, much more strengthening will be needed before the nation’s labor market can be deemed to have fully recovered. It is worth noting, for example, that payrolls increased four months in a row last year (August-November) before retreating. Moreover, while adding jobs is far more preferable to reducing them, only by increasing payrolls in sufficient, sustainable quantities can the labor market be fully stabilized. This standard has not yet been met.

Indicative of the challenge ahead is this stark fact: During the third quarter, when output increased at a blistering 7.2 percent annual rate, average monthly employment actually declined by 73,000 jobs relative to the April-June period. Contributing to this paradoxical situation has been what Federal Reserve Chairman Alan Greenspan recently described as the “startlingly large rise in productivity,” which has been growing at a 5 percent annual pace since the recession ended in the fourth quarter of 2001. Mr. Greenspan marveled at the “astonishing” 7.5 percent average annual rate of increase in productivity achieved during the second and third quarters this year. While productivity increases generate long-term improvements in the standard of living, the short-term consequences include the ability to produce more output with fewer workers.

While monthly payroll employment increased by 125,000 in both September and October, economists estimate that over the long term monthly employment will have to increase by about 150,000 just to prevent the unemployment rate from rising. That’s because the labor force normally expands by 150,000 entrants each month. Further complicating near-term reductions in the unemployment rate is the fact that the labor market will have to absorb a backlog of discouraged workers, who are available for work but have stopped looking for it because they believe there are no employment prospects. As such, they are not considered part of the labor market and, thus, are not classified as unemployed. With payrolls now expanding, discouraged workers will likely re-enter the labor market as newly classified unemployed job-seekers.

Historical perspective offers additional insight into the scope of the job-creating challenge facing the economy. Fewer than 300,000 net new jobs have been created during the past three months of rising employment. During the 20 months leading up to the 1984 election, job growth averaged nearly 350,000 per month. (Admittedly, the 1981-82 recession was much steeper, but the labor force has grown by more than a third since then.) Throughout the eight years of the Clinton administration, payrolls grew by an average of nearly 240,000 jobs per month. Even measured against Treasury Secretary John Snow’s standard of 200,000 net jobs per month, the average job growth of the past three months has fallen short by more than 50 percent.

The labor market has clearly improved in recent months. Equally clearly, it still has a long way to go before it fully stabilizes.

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