- The Washington Times - Tuesday, July 11, 2006

Nonfarm payroll jobs rose a modest 121,000 in June, mainly in services, following a 92,000 increase in May. Job growth finished out the first half of the year with a tempered 142,000 average monthly gain, second-quarter growth trailing growth in the first quarter. The monthly jobs data are based on a nationwide Labor Department survey of about 400,000 businesses and government agencies.

Total employment, however, as measured by the government’s 60,000 household survey, continued sharply upward, for a 264,000 average monthly increase in the first half of this year. Consequently, the number of people unemployed, also collected by household survey, fell below 7 million last month for the first time since the 2001 recession. June unemployment held at 4.6 percent, the lowest rate in five years, and the number of job seekers unemployed over six months declined to its lowest level in the current recovery.

Total employment utilization (the ratio of employment to working-age population) also set a recovery record in June, edging up to 63.1 percent. However, it was still more than a percentage point short of its pre-recession level in early 2001.

The labor force participation rate nudged up a tenth in June to 66.2 percent, an encouraging sign that people outside the measured labor force who want jobs may be entering the labor market and finding employment. They are sometimes referred to as the “hidden” unemployed.

The participation rate hit a cyclical low of 65.8 percent early last year, then partially recovered to 66.2 percent in July through September 2005, only to fall off again in the next few months. Some economists believe the drop in labor force participation since its pre-recession peak in early 2001 is mainly structural and represents a new downward trend rather than a cyclical shortfall. Yet others believe there are still many nonparticipants ready and willing to work, waiting on the sidelines for the job market to improve further. The behavior of the participation rate in the months ahead will help decide the issue.

At least three forces are at work to draw potential workers into the labor force: a growing employment utilization rate; the attraction of a rise in nominal wages; and the need for households to send additional workers into the labor force to offset the eroding effects on income of faster rising prices.

The “true” path of employment probably lies somewhere between the trends of the payroll and household series. Each month the Labor Department prepares a special table comparing changes in nonfarm payroll jobs to changes in household survey employment adjusted to a payroll survey definition.

Prior to the adjustment, the rise in year-over-year household-measured employment in June was 871,000 more than the rise in payroll jobs. During the current recovery that started in late 2001, household employment rose by 3.7 million more than payroll jobs. Definition-adjusted household employment, however, has risen by 353,000 more than payroll jobs since June 2005 and by 3 million more since the recession trough.

Though the adjustment reduced the difference between the two surveys, household employment still shows a stronger upward trend that cannot be dismissed merely because of the household survey’s smaller sample size.

Hours worked and earnings also improved in June. Production workers’ average weekly hours rose 6 minutes to 33.9 hours, the longest workweek in the recovery. Average hourly earnings rose smartly, by 8 cents to $16.70, up 3.9 percent over last year and the fastest annual pace in five years, adding to inflation worries.

In inflation-adjusted dollars, however, hourly earnings have been declining more than two years. Despite the recent pickup in nominal wage rates, inflation has been keeping pace, holding down purchasing power. When employer provided benefits are included, though, real hourly compensation has risen during the recovery.

If the Federal Reserve restrains inflation, considering that the economy is close to full employment and likely to grow at about its potential (maximum noninflationary) rate for the rest of the year, a continued tight labor market along with a possible cyclical slowing of productivity growth (which often occurs in the mature stages of the business cycle) could push real wages higher.

Though the Fed’s Open Market Committee (FOMC) remains on constant alert to the inflation risks arising from international and domestic sources, including the risk of rising unit labor costs and higher fuel costs, the decision whether to further increase the federal funds target rate at its Aug. 8 meeting will depend mainly on forthcoming consumer price data. Statements by Fed officials have made it increasingly clear they pay more attention to price stability than economic growth in the belief that the latter depends on the former.

The behavior of consumer prices and economic indicators generally in recent months suggest that inflation pressures may be more than transitory. All in all, the odds at this juncture favor another quarter-point rise in the federal funds rate at the next FOMC meeting.

Alfred Tella is former Georgetown University research professor of economics.

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