Jobs growth needs more work

Financial Review

Published March 17

Anna Bernasek, New York

For the past three months the job market in the United States has confounded the pessimists. Non-farm payrolls rose by a seasonally adjusted 227,000 in February, the third straight month of growth over 200,000 and the fastest growth spurt in two years. That’s created a perception the economic recovery is finally gaining momentum.

But the jobs picture may not be as rosy as it seems.

Start with the numbers. The labour market needs to add 100,000 new jobs a month just to keep up with population growth. Even though 227,000 seems like a lot, especially after the paltry growth of recent years, only about half of that is actually helping to reduce unemployment.

So while the US economy has added a total of 1.2 million jobs in the past six months, 5 million more jobs are still needed to get back to where the economy was before the recession hit.

What’s more, at the current rate of jobs growth, it could take between three and four years for unemployment to shrink to a more typical rate of 5 per cent from a current 8.3 per cent, according to the Federal Reserve Bank of Atlanta’s job calculator.

Then there’s the long-term unemployment rate which, despite recent jobs growth, remains disturbingly high. The number of long-term unemployed, defined as those jobless for at least 27 weeks, was unchanged at 5.4 million last month. That means 42.6 per cent of those without jobs are long-term unemployed.

Yet even as the labour market becomes stronger, there’s growing scepticism among economists and policymakers that the pace of job gains can be sustained.

Federal Reserve chairman Ben Bernanke told Congress that unless economic growth picked up from its current level of about 2 per cent, recent labour market strength was unlikely to last.

That’s because the jobs spurt and aggregate economic growth don’t seem to match. Typically, monthly job growth of 200,000-plus occurs when economic growth is far higher, about 4 per cent or more. Last year the economy grew at 1.7 per cent and since the end of 2009, 2.5 per cent. Even in the face of the stronger labour market, economists have been revising growth forecasts lower for 2012.

Christina Romer, an economist at the University of California Berkeley and former chair of the Council of Economic Advisers to President Barack Obama, believes overreaction may explain recent hiring. Romer recalls that as the financial crisis hit, managers panicked and fired staff more aggressively that most forecasters expected. Now that the world hasn’t ended, they may be hiring to fill some of those positions they slashed. If so, the hiring trend may run out of steam unless the pace of economic growth picks up.

Wages are perhaps the most revealing sign of the health of the labour market. While jobs are growing, they’re not necessarily good-quality jobs, making the path back to a pre-recession economy even more arduous.

You can detect the destruction of good-quality jobs in the employment report. Good jobs in finance and government are shrinking while low-quality jobs in services, particularly restaurants and retail, have grown.

The overall wages picture has been grim for a while. In the past 10 years, even workers with a college degree have failed to see any real wage growth.

According to the Economic Policy Institute, young workers’ labour market prospects are a good barometer of the strength of the overall labour market.

From 2000 to 2011, when overall wage growth was disappointing, wages actually fell among every entry-level group regardless of education. Wage losses occurred for each group of entry-level workers between 2000 and 2007, as well as during the recession years between 2007 and 2011.

Inflation-adjusted hourly wages of college-educated men in their 20s dropped 5.2 per cent from 2007 to 2011 and for female college graduates 4.4 per cent. This is on top of declining wages before the recession hit, between 2000 and 2007, of 2.5 per cent for college-educated men and 1.6 per cent for college-educated women.

Inflation-adjusted hourly wages of recent high-school graduates are worse, dropping about 9 per cent overall from 2000 to 2011.

“In short, in the most recent decade, the most-educated workers [college graduates] with the newest skills [recent degrees] did not fare well at all; their wage opportunities fell even as overall productivity in the economy continued to soar,” the Economic Policy Institute reported.

The further back you go, the worse the trend looks. Save for a brief period between 1995 and 2000, when wages grew, real wages have been declining for entry-level workers since the late 1970s.

Health and pension benefits have also been declining for workers, adding to a reduction in overall compensation levels.

So the recent monthly job numbers are a welcome relief. But they don’t change the overall jobs picture very much – at least not yet.

Anna Bernasek writes on financial markets, the economy, Wall Street and public policy from New York. She is the author of The Economics of Integrity.