Underlining the Recovery’s Shortfall

Jared Bernstein is a senior fellow at the Center on Budget and Policy Priorities in Washington and a former chief economist to Vice President Joseph R. Biden Jr.

Like other economists, I suspect that the unexpectedly low payroll growth number for December â€" up 74,000 compared to an expected 200,000 â€" will later be revised upward (one economist told his clients to “ignore the wild payroll number”).  Unlike many others, I don’t think it’s a huge surprise.  Yes, there are various indicators suggesting that the underlying economic recovery is poised to accelerate â€" the business pages are replete with articles about how 2014 is going to be the breakout year for the economy.  But jst whose economy are you talking about?

The job market in particular, at least by certain indicators, has been a real laggard â€" and while, again, I think the December payroll number will be revised upward, it’s a reminder that the recovery has not reached the job market in a reliable way.

First, the report.  It’s very much worth remembering back to your Stats 101 course, specifically the part about statistical outliers.  I was particularly struck by the fact that the health care sector shed jobs (down 6,000) for the first month in more than a decade (and if anybody says “Obamacare!,” I swear, my head will explode).  I’d be pretty amazed if that’s not revised upward when the Bureau of Labor Statistics gets more complete data.

Rather than focus too much on a one-month number that will be revised in coming months, we should look at the longer-term trend.  Payrolls were up 2.1 million, or about 180,000 a month, both last year and the year before.  That’s neither a great nor a terrible pace.  But what it’s demonstrably not is fast enough job growth to reverse the striking decline in the share of the population in the labor force.

That fell last month again, by 0.2 percentage points, and it’s down 0.8 percentage points over the year, a highly unusual result at this stage of an economic expansion.  The decline in the unemployment rate both last month and over the past year has mostly been driven by the phenomenon of a declining labor force.  And it is but one of many important indicators showing how we are simply not out of the economic woods:

Percent by which real GDP is below its potential (according to Congressional Budget Office): $800 billion, or 4.6 percent

Percentage points by which the unemployment rate is above “full employment:” 1.2 (the Congressional Budget Office says the full-employment unemployment rate is 5.5 percent; Dean Baker and I think that’s too high … so I’d say that 1.2 is actually downwardly biased; the decline in the labor force, which artificially lowers the unemployment rate, is another source of downward bias).

Percentage points by which the employment rate is below its pre-recession peak: 4.8

Same for the labor-force participation rate: 3.6

Jobs gap (according to Heidi Shierholz of the Economic Policy Institute): 7.9 million

In other words, I’d tell my “clients” definitely not to ignore this bad payroll number.  Instead, take it as reminder that we’ve still got large gaps to close before the economy’s up to speed.  In fact, the longer we remain below the speed limit, the more we lower that limit, as cyclical problems morph into structural ones.

I’d also remind them that it’s the job market, not the stock market, that most people depend on for their economic well-being, and as long as the former remains below full employment and with a declining share of participants, the benefits of growth will not reach far beyond the top echelons.  Finally, I’d remind my clients up on Capitol Hill that even considering the likely upward revision, the December report should increase ongoing efforts to extend long-term unemployment benefits (and to not worry so much about “payfors”). The signal-to-noise ratio may be a lower than usual in the latest jobs report, but if you listen more carefully, it’s still saying something worth hearing.