Despite the weakness in employment in recent months, the unemployment rate has oddly remained low. Why?
Total employment as measured by the government’s household survey has been flat so far this year, and the employment-population ratio, a measure of labor resource utilization, has been on a declining trend since last December. Monthly growth in nonfarm payroll jobs, as reported by employers, has averaged only 100,000 in the last seven months and a paltry 44,000 in the last three months. In five of the last seven months, the increase in payroll jobs has been well below the growth in the working-age population.
Ordinarily, stagnant or below-population employment growth results in rising unemployment. Yet last month’s jobless rate, 4.6 percent, was the same as in January.
A look at the historical record is revealing. The employment-population ratio in early 2001, prior to the onset of the last recession, measured a healthy 64.3 percent. It subsequently declined to a cyclical low of 62 percent in September 2003, and thereafter partially recovered to 63.4 percent last December. It has since trended downward, falling by 0.6 to 62.8 percent last month.
In the last half century there has rarely been that large a decline in the employment ratio outside of a recession. (There have been eight recessions since 1957.) When there was a falloff in the employment ratio that large, it signaled a sustained cyclical decline and was accompanied by an increase in the unemployment rate. Sometimes there was a short lag between weakening employment and rising joblessness, usually one to three months, reflecting a delay between job loss and job search.
Does this mean we may be in a recession now but don’t yet know it? No — at least not according to other key economic indicators, though there are signs that economic growth is slowing. In terms of believability, the government’s two employment series, which are from independent surveys, carry more weight than the conceptually less clear-cut unemployment data.
Why hasn’t the unemployment rate responded to the weakness in employment? Several explanations come to mind. Workers who lost or couldn’t find jobs may have dropped out of the labor force, as is suggested by a sharp below-trend decline in the labor force participation rate since last December. To some extent, labor force withdrawal or nonentrance may be voluntary and reflect a greater preference to do other things than work for pay.
The recent credit crunch and its spillover delivered a sharp blow to the housing market and construction-sensitive industries. Jobs that many illegal immigrant workers hold were probably hard-hit. There are illegal immigrant workers in the underground economy who evade the employment count, and there are others who work in payroll jobs that their employers include in the count they report to the government. In an environment of tightening up on illegals by the federal government and many state and local governments, illegal immigrants may have become wary and been avoiding government survey takers. In that event, their unemployment would be invisible to the official data.
According to a recent analysis by Steven Camarota, research director of the Center for Immigration Studies, the preponderant share of job growth in recent years has gone to immigrants rather than native-born Americans, even though the latter account for most of the increase in the adult population. It may be that in a weakening labor market fewer immigrants are coming to the U.S. and some who came earlier are leaving.
It’s also possible that more workers are looking for jobs in ways that don’t officially qualify them to be counted as unemployed. For example, people who want a job and regularly check help-wanted ads are not counted as unemployed. Yet people who check labor union registers, according to the Labor Department, do qualify to be counted as unemployed.
Quite possibly the unusually long and at present unexplainable lag this year between employment weakness and unemployment will soon disappear, resulting in a sizable catch-up rise in the unemployment rate. Certainly the current low and sticky official jobless rate should not be interpreted as a reason for the Federal Open Market Committee not to cut the federal funds rate at their upcoming meeting tomorrow.
Alfred Tella is former Georgetown University research professor of economics.