- The Washington Times - Thursday, February 9, 2006

The Bureau of Labor Statistics (BLS) reported Feb. 3 the unemployment rate declined from 4.9 percent in December to 4.7 percent in January, the lowest since July 2001.

This represents a half-point drop from the jobless rate of a year ago and a marked drop from the post-recession peak of 6.3 percent in June 2003.

Long-term joblessness also declined and wages continued rising, though weekly hours remained sluggish.

Employment gains were widespread as January nonfarm payrolls rose smartly, by 193,000 (preliminary), with revisions adding 81,000 more jobs for November and December. Year-over-year, January nonfarm jobs were up a hefty 2.1 million.

Total employment, measured in the government’s household survey, topped that increase with 2.8 million annual growth, and when adjusted for the introduction of new population controls in the survey, the year-over-year gain was slightly higher, an impressive 2.9 million.

The BLS also reported revisions to last year’s payroll job numbers based on new benchmark data from unemployment insurance tax records and other adjustments. While the revisions slightly lowered the payroll count for the year, their pattern was revealing. For the first seven months of the year, job growth was slightly less than previously reported. But for the last five months of the year, growth was faster than earlier reported, by about 150,000, lending an upward tilt to the rising trend of recent months.

The unemployment picture, however, was not all it seemed.

Not every decline in unemployment occurs because of job gains. Sometimes the unemployment count falls because, even though overall employment may be rising, some people can’t find jobs and either leave or postpone entering the labor force. The behavior of the labor force participation rate (the proportion of the working-age population in the work force) helps tell the story.

After rising in the 1990s, the participation rate trended downward in the last recession and postrecession period of job weakness. Though job growth quickened, starting in 2004, the labor force participation rate lagged, reaching a postrecession low of 65.8 percent in early 2005.

The rate then perked up, rising to 66.2 percent last summer, only to falter again and drop off to 66 percent in the past two months. Most of the recent decline was among adult men, though the teenage participation rate has also fallen off.

The drop in labor force participation since last July has made it easier for the unemployment rate to decline. Had the participation rate not fallen, the jobless rate last month would have been 5 percent instead of 4.7 percent. That’s not much different from what it has been for a year.

If the pickup in the participation rate in the first half of 2005 had continued to the present, the jobless rate would have risen to about 51/2 percent last month. If more people return to the labor market in months ahead, stronger employment growth will be needed to keep the unemployment rate from rising.

Despite the low current jobless rate of 4.7 percent, which some economists say represents full or near-full employment, taking into account potential workers on the sidelines means full employment is still a year or more away.

More positively, the earnings picture has been better than the headline wage data have led us to believe. According to BLS earnings data, the inflation-adjusted wage rates of nonsupervisory workers have been on a downward trend for two years, though they have turned up in the last few months.

However, the BLS adjusts the earnings data for inflation using an unchained wage-earner Consumer Price Index, which is the bureau’s second-best price measure in that it fails to take account of short-term shifts in buying patterns in response to changes in relative prices. Economists prefer the BLS chained price index, which doesn’t have that shortcoming.

Since the chained price index doesn’t rise as fast as the unchained index, when the former is used to adjust for inflation, real wages rise faster.

Real wage rates adjusted by the unchained price index closed out last year down 1.2 percent from two years earlier. Based on the chained price index, real wage rates last December had regained their previous level. (Price data for last month are not yet available.) Compared to a year earlier, unchained price-adjusted wage rates at year end were lower, while chained price-adjusted wage rates were higher. And between November and December, the latest period for which data are available, chained wage rates rose twice as fast as the traditionally measured unchained rates.

Workers are doing better. If inflation remains contained and with tightening labor markets, they will likely continue to do so and bolster the current economic expansion.

Alfred Tella is former Georgetown University research professor of economics.

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